Indemnification and Insurance :: Contractual Risk-Transfer Provisions
By Amy Elizabeth Stewart
Designed to shift responsibility from one potentially liable party to another, indemnity agreements are commonplace in many corporate contracts. These risk-transfer provisions appear routinely in agreements with vendors, suppliers, contractors, service providers, and other third parties, playing a central role in corporate risk management.
When appropriately tailored to the parties’ relationship and the associated risks, indemnity and insurance terms can provide substantial protection to the company by transferring specified exposures to a third party and its insurers. As a practical matter, however, disproportionate reliance on existing form contracts and inconsistencies between the contract provisions and the parties’ insurance policies can spawn significant challenges, which often wind up in the legal department when the intended risk transfer does not function as planned.
Amy spoke at the spring 2019 UT Law CLE’s 41st Annual Corporate Counsel Institute on the interplay between indemnity agreements and insurance provisions in third-party contracts as a mechanism for transferring risk and the impact these provisions have on the insurance policies maintained by the contracting parties. A downloadable pdf of the paper accompanying the presentation can be found at the bottom of this article.
Here are the highlights:
Important Points to Remember About Indemnification and Insurance
Indemnity is not insurance! While indemnity agreements and insurance policies both transfer particular risks to another party and impose “indemnity” obligations, the similarities end there. While corporate counsel will appreciate the distinctions between indemnity provisions in the company’s third-party contracts and the company’s own insurance policies, keep in mind that some business clients may conflate these risk-transfer tools, equating indemnity protection with insurance and treating capped contractual indemnity as another form of “insurance.”
Indemnity provisions are commonly coupled with insurance requirements that reinforce the risk transfer by seeking to ensure that the indemnifying party can fulfill its obligations. The imposition of minimum insurance requirements and the request that indemnitees be named as additional insureds are ways of circumventing uncertainty regarding both the solvency of the indemnitor and the enforceability of the indemnity provision. An insurance clause that requires the indemnitor to name the indemnitee as an additional insured on the required policies provides greater protection to the indemnitee. The indemnitee should also request a certificate of insurance confirming its status as an additional insured.
When drafting indemnity and insurance provisions in significant contracts, corporate counsel should focus on the particular risks associated with the transaction or service and tailor the risk-transfer provisions accordingly. When boilerplate contract terms are copied and pasted from predecessor agreements with minimal customization, the risk transfer may not operate as intended or the appropriate insurance may not be in place. If the indemnity provision is amended mid-term to address new or evolving risks, pay attention to the insurance clause to avoid an unintended insurance gap.
The insurance coverage available to an additional insured under an indemnitor’s policy may be subject to limitations not expressed in the policy itself if the policy clearly manifests an intent to incorporate limitations expressed in the contract. Judicial application of this rule has generated significant uncertainty for additional insureds. As such, a named insured seeking to limit the scope of coverage accessible to an additional insured should express that limitation with extraordinary clarity—in both the third-party contract and in the policies, especially the policies. Additional insureds must focus on the language of the service or vendor contract to avoid uncertainty, keeping in mind that limitations in the contract may be read into the insurance policies.