Sign On the Dotted Line: The Importance of Understanding Service Provider Contracts

This entry is part 2 of 5 in the series Business Contracts

Picture this: An elderly couple wakes up on a cold morning in the middle of winter and they head out for breakfast. On their way, Lenny and Gertrude decide to swing by your business. They pull in and park their car. Lenny rushes out to open Gertrude’s door, as he has done thousands of times before. In his haste, poor Lenny doesn’t notice a small patch of ice on the ground and he slips, breaking his hip. Lenny doesn’t believe your business caused the fall and refuses to turn in a claim. However his healthcare provider, knowing the incident occurred on your property, has gladly decided to pursue a claim on his behalf and begins sending threatening letters to your business.

As a claims professional, hundreds of claims cross my desk in a given year but no claim type matches the frequency and severity that comes with slips, trips, and falls. Often times these falls occur as a result of snow and ice in a parking lot that is serviced by a contractor or as a result of rugs delivered by a linen provider. It’s only after a claim has occurred that a second thought is given to that contract you signed with a service provider that ended up stuffed into the bottom of a filing cabinet somewhere. The simple truth when it comes to liability is that those contracts do matter. They may not always be iron-clad but they can help or hurt your bottom line.

gavelThe part of the contract that often has the largest impact on liability is referred to as the indemnity agreement or clause. Simply put, the term “indemnity” refers to a protection against a loss or other financial burden.  As with any contract, the language of the indemnity clause is very important. For example, when does the obligation arise? Does it cover legal fees or just damages? What happens if more than one party is at fault? There is no exact formula to answer these questions. Oftentimes, the answers to these questions can be found after a careful reading of your service provider contract. Below are some examples of generic indemnity clauses.

  • A typical broad indemnity clause might say:

“Contractor agrees to indemnify and hold harmless Owner of and from any and all claims, demands, losses, causes of action, damage, lawsuits, judgments, including attorneys’ fees and costs, arising out of or relating to the work of Contractor.”

Clearly, this language seems to cover every possible type of potential loss, and even kicks in at the pre-litigation stage. It also covers attorneys’ fees and makes no accommodation for the possibility that someone else might also be responsible.

  • A narrower version of this clause might say:

“Contractor agrees to indemnify and hold harmless Owner of and from any and all claims, demands, losses, causes of action, damage, lawsuits, judgments, including attorneys’ fees and costs, but only to the extent caused by, arising out of, or relating to the work of Contractor.”

This additional language suggests an apportionment of relative fault between the parties.

  • A provider may also cap their exposure. In that case, the indemnity clause might read:

“Contractor agrees to indemnify and hold harmless Owner of and from any and all claims, demands, losses, causes of action, damage, lawsuits, judgments, including attorneys’ fees and costs, to the extent caused by or arising out of or relating to the work of Contractor. In no event shall the maximum liability hereunder exceed the sum of $ _________. “

As you can see, the indemnity obligation in your contract could have immense financial repercussions, and should not be taken for granted. There is no “one size fits all” indemnity clause. Each one must be tailored to your specific situation and the laws of the jurisdiction in which you operate must be taken into account. It is important to read and understand what that clause provides, even if it is non-negotiable. By understanding your contract, you enter the relationship with your eyes wide open, so when Lenny breaks his hip on your property, you know that the contract at the bottom of your filing cabinet is more than just a piece of paper. Contact your local Society agent to learn more.

As we head into the winter season, are you considering hiring a snow removal contractor? Before you sign that dotted line, click here to clear the confusion with snow removal contracts.

Thank you to Heather Friedl, Society Insurance House Counsel, for contributing to this article.

Series Navigation<< Clearing Confusion with Snow Removal ContractsBusiness Contracts: Certificates of Insurance and Liability Limits >>
Print Friendly, PDF & Email

Leave a Reply

Your email address will not be published. Required fields are marked *

Prove that you are human! Time limit is exhausted. Please reload CAPTCHA.