Municipal and School Contracts: What's in That Insurance Section Anyway?

Richard Dwyer and Paul G. Sanderson

When a political subdivision of the State seeks to purchase, build, rent, lease or enter into any kind of an agreement with another party, there should always be a written document that clearly states the roles and responsibilities of all the parties. The contract should also be very clear as to who is assuming the liability for certain assets, actions, events or duties. These considerations are generally found in the "Insurance" section of the contract. This article addresses insurance, liability, risk sharing and certain common phrases or clauses frequently found in contracts that you may be asked to sign for your employer.

Liability is always based upon the language contained in the written document. So clarity and enumeration of all risk factors in the contract should be the responsibility of each party. Any potential happening needs to be contemplated and mutually agreed upon before an unforeseen issue arises and each party attempts to transfer liability to the other party after the document is signed-and after the "accident" occurs.

As an additional incentive to memorialize agreements in writing, New Hampshire statute RSA 382-A:2-201, part of the Uniform Commercial Code, states that "a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties." In addition, there is RSA 477, a law specific to contracts for real estate purchases. By making contracts a matter of law, the legislature wants to ensure that large commercial agreements can't be left to the variable nature of human memory if either party desires to resort to a court to enforce the underlying promises. Furthermore, courts have rules for interpretation of what the writers meant by examining the contract as a whole and trying to identify the parties' intent in forming the contract.

Courts will examine the "ordinary meaning" of the words in the contract by first using a reasonable interpretation of the words as well as industry language. They may also consider the past practice and custom between the parties or within the industry. Finally, any ambiguities will be interpreted against the contract drafter. So sign carefully!

Litigation costs have become so expensive and time consuming that anyone conducting business on behalf of their political subdivision must clearly and appropriately state the duties, responsibilities and liabilities within the contract to avoid future clashes on what was the "intent" of the parties. Being specific when writing a contract will save you time, expenses and possible grief after the claim inevitably happens.

When drafting your contract, New Hampshire Local Government Center Property-Liability Trust (PLT) staff recommends that you consider the following areas closely.

Insurance Requirements
Since many of you have PLT or Primex3 for property and casualty protection, it is worth mentioning that PLT and Primex3 are "pooled risk management programs" as defined by RSA 5-B. Neither entity is, by definition, "insurance" as used by most vendors with whom you may have contracts and agreements. Therefore, you need to inform these other parties that any wording reference to insurance in their document has a different meaning when applied to LGC or Primex3.

Pooled risk management programs provide you with coverage and protections (specifically for Risk Pool Groups with PLT) according to the PLT Member Agreement or the Educators' Member Agreement. While LGC or Primex3 afford you coverage protection, as stated in their controlling documents, neither entity can provide you with "Commercial General Liability," as most insurers state it in their contract requirements. Therefore, you will need to point out that nuance of a terminology difference to your vendors-especially when they are using their own boilerplate wording in contracts.

Hold Harmless Clauses
Hold harmless clauses are in almost every contract. The purpose of such clauses is to attempt to have the two parties agree not to hold the other responsible for certain acts or under certain circumstances (e.g., acts of God, events beyond the control of the parties and unforeseen circumstances).

Your agreement should always spell out what those acts and/or circumstances are in such specificity so as to avoid confusion as to who is at risk. Do not hold someone else harmless in a contract when a future event may occur and you have no recompense for the harm they may have done to you. In short, be wary of a hold harmless clause and its implications.

Defending Other Party
When you agree to "defend" the other party, you are ultimately agreeing to hire an attorney at your expense to protect them from a suit that someone else may be bringing against them. Do you really want to use your money to defend them for something that they did or should have done?

Each party should be responsible for their own actions or omissions but not necessarily for the actions of the other. It would not be in the public interest to pay the litigation costs of someone who had brought the harm to themselves or to you.

Indemnification Wording
Many contracts weave "hold harmless," "defend" and "indemnification" wording together in the same sentence. Indemnification actually means that you will compensate the other party for any loss that the other party may suffer because of your actions during the performance of the contract. Of course, the problem comes about when the other party claims you did something that harmed them but you don't agree that your actions or omissions caused them harm.

You should also be mindful about whether the wording says the other party needs to prove you were actually negligent or if they only have to allege you were at fault. Since agreeing to an indemnification clause equates to you possibly paying compensation to another, you should clearly define the engagement terms along with who is at risk and for how much.

Additional Insured or Loss Payee
The other party may also ask that your coverage protect them as an "additional insured" or a "loss payee." They are doing so to protect themselves and know that they will be reimbursed directly by your insurance company or pooled risk management program if your actions cause them a loss. This type of contract language ensures they would not have to file a claim against their own insurance policy, possibly affecting their own premiums.

Most frequently, PLT sees such requests for additional insured or loss payee status when a municipality or school wants to use somebody else's property or lease an item. What the other party is ultimately asking is for your coverage carrier to pay them for the full amount of what is still owed, for example, on a copier machine or leased vehicle if the copier is damaged in a fire or if the vehicle is destroyed in an accident. Since the other party has an interest in the asset that you are leasing, or if you were using their property for an event, you should provide them with some arrangement whereby they can get reimbursed for losses or damages that you caused.

The important part of this clause is that you only agree to add them relative to a loss caused by your sole negligence versus anything the contracting entity or another party might have done. Make sure that you do not agree to extend any of your protections for covering their negligence or acts of any other party.

Subrogation Clause
This clause has to do with your ability to get paid by your own pooled risk management program or commercial insurer for your losses, but it retains your carrier's right to go after the party that harmed you. The best example of this is auto insurance-when somebody collides into you and it is their fault. Customarily, your own pooled risk management program or commercial insurer pays for repairs first and then goes to the other person's carrier to get repaid. Adding a clause that says you waive your subrogation rights essentially means you and your coverage carrier go after the other party-even if your contractor, architect or subcontractor was completely at fault.

The reason for this kind of a clause is to reduce the other party's liability premiums because their carrier won't have to pay if you have coverage that will pay first. The "waiver of subrogation" phrase is something you need to strike from any contract. In addition, pooled risk management programs like PLT have wording in their agreements with municipalities and schools stating that you cannot waive our rights to subrogation. That clause is included in PLT's Member Agreement and Educators' Member Agreement because pooled risk groups want to keep their contributions low. The LGC, by using its right of subrogation, can keep contributions low by paying your claim promptly and then by collecting reimbursement from the other party's insurance carrier.

Choice of Law Clause
Be mindful when reviewing a contract for which a set of laws will be applied to it. Ask yourself the following:

  • Do I want the law of another state to control the outcome of any subsequent dispute, especially without having any idea what those laws say?
  • Do I want to waive the statutory immunities and damage caps available under New Hampshire law?
  • Do I want to be forced to litigate, mediate or arbitrate in another state?

If you answered "no" to any of these questions, you should not sign an agreement that says all disputes will be handled anywhere other than in New Hampshire.

Statutory Protections
New Hampshire RSA 507-B:4 states that the liability of a governmental unit for bodily injury, personal injury or property damage sustained by any one person is limited to $275,000. Also, damage sustained by any number of persons in a single incident or occurrence is limited to $925,000.

This law recognizes unique situations that local governmental entities face when they are performing multiple activities for the public good while bound by scarce resources.

Arbitration Considerations
When you become involved with a contractual dispute, you may want to consider arbitration where all the parties can present their positions to an impartial third-party or panel for a decision. Our advice is to not agree to binding arbitration unless you also add a phrase in the contact that says "… binding arbitration, subject to RSA 507-B." By adding that phrase you will still retain the statutory immunities provided by the law, and the arbitrator will also be bound by those amounts.

Liability and risk have been frequently addressed here. However, this article should not be relied upon as legal advice for any specific contract. Remember, liability is the responsibility assigned by law for your actions, and those of the other party, subject to the contract or agreement. Therefore, the binding document between all the parties should be written and agreed upon to clearly state what liabilities you are assuming and what liabilities your other party is accepting.

Since language in a contract can shift risk from one party to another, you need to protect your employer and yourself accordingly by crafting a document to address as many eventualities as possible. Silence on one term in the contract may mean you have assumed more risk than you had intended.

Since facts and circumstances vary with each contract, you must carefully read any proposed binding document. You should always seek competent legal advice to assure that you are not unknowingly missing an important item.

Richard Dwyer is Information Manager of Risk Pool Operations, and Paul Sanderson is a Staff Attorney at New Hampshire Local Government Center. Local officials in New Hampshire Municipal Association-member municipalities may contact LGC's legal services attorneys for more information on this and other topics of interest from 8:30 a.m. to 4:30 p.m. weekdays by calling 800.852.3358, ext. 384. School officials should contact the New Hampshire School Boards Association attorney at 800.272.0653.

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