Indemnity – Are you an Insurance Company?
Nick Langer, Senior Risk Advisor – Turner Surety & Insurance Brokerage, Inc.
Everyday your private security company performs service for its clients. As owners, executives and managers we have expectations of our employees… appearance, behavior, dependability, etc. Your clients, naturally, have expectations of your security company as well. Frequently there are misunderstandings between your clients’ perceived expectations of your company’s services and the actual services provided by your company. Most successful security providers invest much time and resources into meeting or, better yet, exceeding their clients’ expectations. While client satisfaction is important in the success of your company, your contractual obligations to your client as defined in your contract or service agreement are paramount in the protection and longevity of your security company. Fully understanding your contractual obligations and duties and what type of risk your company is assuming under the contract should be thoroughly analyzed before executing any contract or service agreement.
I must preface the remainder of this brief by making it clear that implementing or executing your security company’s own contract or service agreement with its clients can create the most favorable contractual relationship for your company…. assuming an attorney has helped draft it. With that being said, it is very common for most clients to require you, the security provider, to sign their contract. In analyzing a typical contract you’ll come across various elements establishing duties, responsibilities, etc. Clearly all of these obligations are important in understanding the intentions of the contract or most specifically the requirements of the contracting parties (your company and your client). All elements of a contract are relevant, however the Indemnity/Indemnification/Hold Harmless contract language should be examined in great detail.
Before diving into the Indemnity language of the contract, it is important to understand “why” this contract between you and your client is being implemented in the first place. The short answer is “risk transfer.” YES, your client has transferred their risk onto your security company the moment your company begins, or agrees to begin, providing security services to them. To what degree your security company has assumed risk associated with the location and/or post orders is ultimately determined by the language contained within the four corners of your executed contract or service agreement. Remember, your client has hired your security company to protect them from, or prevent, various types of risks, e.g., bodily injury, property damage or financial loss from occurring. In almost every situation, the locations your company is securing are under your care, custody & control. With this care, custody & control of the location comes much risk…. Which is “why” your client has hired your security company in the first place. Your security company is a risk transfer tool.
Risk transfer is a very common practice in risk management strategy. In fact, every time we purchase insurance we have engaged in a risk transfer agreement with the insurance carrier; that is, we pay insurance premiums to the insurance carrier and in return the insurance carrier promises to defend us or protect us and/or our property from certain risks or perils identified in the insurance policy. It is incredible how remarkably similar an insurance transaction is to the relationship between a security company and its client, i.e., the client pays the security company and in return the security company promises to provide services to protect the client or prevent certain risks from occurring. This begs the question, “Are you an insurance company?” In theory, the answer is “NO” however you must pay close attention to the obligations created contractually between you and your client to ensure that the expectation is not created for your security company to act as an insurer.
In taking a deeper look into the critical elements of your contract, the Indemnity language will be most important as respects managing your company’s risk. Indemnification clauses are also referred to as a “hold harmless” agreement. These types of agreements establish that the Indemnitor will agree to protect and indemnify the Indemnitee from damages such as bodily injury or property damage that occur from the negligence or negligent acts or omissions (intentional or unintentional) by certain parties. Once you agree to indemnify your client you have agreed to not only reimburse your client for certain losses or occurrences which arise at their location, you are also going to be required to defend them. There is frequently a misperception of this concept. Unfortunately many people take the approach of managing their company’s contractual risk by merely accepting the terms of a contract under an assumption that the company’s insurance programs are the catchall solution to any adverse situations which arise. That assumption is dangerous. There are many risks and occurrences to which insurance simply will not respond. Even the most robust insurance policies cannot be relied upon as the resolute solution in risk management. Insurance is one of many risk management tools that can be used to transfer some of your company’s risk onto an insurance carrier, however you must identify and manage those risks that insurance will not respond to. When analyzing the Indemnity language in your contract it is important to remember that the indemnification and defense of your client remains enforceable regardless of the existence of any insurance policies maintained by your company.
There are three levels of indemnification to familiarize yourself with– broad, intermediate & limited.
Broad Form Indemnity: Broad Form Indemnity requires one party (the Indemnitor) to assume the obligation to indemnify and hold harmless another party (the Indemnitee) even if that other party is solely at fault or negligent. The phrase “caused in whole or in part” used in the indemnification clause is a key indicator of a Broad Form indemnity agreement. This type of Indemnity poses the most risk to your company and in many states may not be enforceable.
Intermediate Form Indemnity: Intermediate Form Indemnity indemnifies a party (the Indemnitee) for its own negligence, except if that party is solely at fault or negligent for the occurrence. With an Intermediate Form Indemnity the Indemnitor agrees to indemnify and hold harmless the Indemnitee if a claim, demand or suit is brought against them for an occurrence caused in whole or in part by the Indemnitor’s negligence, including the contributory negligence of the Indemnitee. The phrase “caused in part” in the indemnification clause is a key element in establishing an Intermediate Form indemnity agreement.
Limited: Limited Form Indemnity is really a concept that follows common law principal in that a party is responsible for their own negligence. With a Limited Form Indemnity the Indemnitor agrees to indemnify and hold harmless the Indemnitee in the event a claim, demand, or suit is brought against them as a result of the Indemnitor’s direct negligent acts. A key phrase to look for in a Limited Form Indemnity is “only to the extent.”
Once you have determined the type of Indemnity imposed by your client’s contract it is critical to reference your insurance policies to ensure that coverage will respond, before you execute the contract or begin performing services. Frequently we see contracts which contain Indemnification language which is broader than the coverage afforded under an insurance policy. The Indemnity language is one of many parts of your client contract that should be negotiated whenever possible. We have all encountered situations in which your client presents the “take it, or leave it” contract. In every other situation you should at minimum ask if the client is willing to negotiate the indemnity language. Negotiating a reasonable Indemnity agreement can mean the difference of having a claim covered under your insurance policy or not. Carefully review all contracts with your attorney and insurance broker prior to execution so that you can enter into the relationship with your client knowing and understanding all of the risks involved. While your security company can make many promises as respects its ability to deter losses from occurring, it is impossible for your company to guarantee there will never actually be a loss. Know the risks and don’t let your security company become an insurance company for your client.