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Health & Fitness

Financial Exposure Arising from Signed Contracts

Entering into a contract that is not fully understood may be a road to future problems.

Nicole Mandel Kelliher, Neighbor
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It is not always understood that when companies sign contracts, there is potential
liability that the company assumes in the contract terms.  Entering into a contract that is not fully understood may be a road to future problems such as being required to pay for damages caused by business partners, waiving rights and defenses for accidents that may occur, and even providing coverage under the company’s insurance policy to others, including any other party to the contract. 

Some helpful tips to keep in mind when entering business contracts include:

  • Appoint a limited number of people to execute contracts on behalf of the company. A limited number of trained and closely monitored people should be authorized to sign contracts. Competent insurance professionals or lawyers can aid in the transaction to fully explain the ramifications of the contract provisions which may create liability for which the company needs to be certain that there is coverage.   
  • Specifically state what liability the company assumes.  It is     standard practice in many industries that the contracting party will be
    responsible for anything that goes wrong during the course of the business
    relationship.  Read contracts carefully to negotiate a limitation as to what liability is assumed by your company under various circumstances. 
  • Limit liability to damages covered by your insurance policy.  Plain and simply stated, insurance does not cover all occurrences. While the terms of a contract that a company signs can hold it responsible for paying for damages that arise under the contract, these may not be covered under your policy. Understand the exposure and attempt to limit contractual liability to only losses that would be covered by your insurance policy. 

  • Avoid adding others as additional insureds.  When another individual or
    business is added as an additional insured, your company then provides
    insurance coverage under the company’s policy.  This results in increased risk and expense when you become responsible for the acts of others who may not be under your control. 
  • If you do name and additional insured, research their history.  If the terms of a contract require you to add an additional insured, be sure that you know with whom you are working.  Research to verify that those to be
    added to the policy are dependable people/entities.  The insurance policy that covers your business, and for which you pay, will be providing insurance coverage for the action of others and it is not in your best interest to substantially increase your liability risk unless you receive corresponding benefits. 
  • Always request to be added as an additional insured status under another company’s policy.  If you can become an additional insured of the other party, you will gain increased protection that you are not paying for.  

    •   Article by: Bonnie S. Stein, Curtin & Heefner LLP.

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     E-mail: bss@curtinheefner.com

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