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Case Studies & Whitepapers

Real business problems solved by Society

When disaster strikes our policyholders, they count on Society to step in and help piece things back together. With over 100 years in business, we’ve handled all sorts of issues for the industries we specialize in. Here are a few real-life examples detailing how we’ve helped small business owners like you overcome unique industry challenges.


Using Contracts to Protect Your Business: Certificates of Insurance, Hold Harmless and Indemnification Agreements

Supermarkets & Grocery Stores, Convenience Stores & Gas Stations, Restaurants & Bars, Auto Service & Garage, Contractors, Cleancare & Waterworks, Food & Beverage Producers, Hotels, Motels & Resorts, Medical Offices & Clinics, Risk Management, Small Business, Society Insurance

Download a pdf of this whitepaper here.

As a business owner you can't do everything yourself;  this becomes more evident as your business grows and expands. To better manage your business, you may hire outside experts or contractors to help maintain your facility or provide a service to your customers. This may include carpenters, plumbers, electricians and snow removal contractors who will work on your property. This may also include a service provider hired to deliver a product to your customer, or install or service your product at your customer’s home or business.

You will enter into agreements when hiring these contractors. Your insurance agent, or perhaps a Society Insurance Risk Control Representative, will advise that you need to obtain certificates of insurance and have a hold harmless and indemnification agreement.

But what are those? Why do you need them? And what should they entail? While often spoken about in the same sentence, these are actually two different legal documents designed to protect your business from liability and financial harm. Let’s look at them one at a time.

Certificate of Insurance

A certificate of insurance is necessary when a business needs to prove that they have the correct insurance coverage and adequate insurance limits in place. This is important if a claim arises and the business is found liable while providing their service or engaged in their trade.

Think about when a snow plow contractor is hired to plow a parking lot, clear sidewalks and apply ice melt. There is an expectation this will be done in a timely and safe fashion. But what if they hit and damage a parked car while plowing the lot? The car owner will look to the parking lot owner to pay for the damage. The lot owner will expect the snowplow contractor to pay for the damage because they caused it – it’s their fault! After an accident has already happened is not the time to find out that the snowplow contractor doesn’t have auto or liability insurance.

Whenever a business enters into a contract or service agreement with another party, they should require that a certificate of insurance be provided before any work begins. The certificate should be for all lines of coverage including commercial general liability, commercial auto liability, workers compensation and umbrella.

Note that commercial general liability and commercial auto liability are different from personal insurance. Using snowplowing as an example, anyone can put a plow on a pickup truck and hire out to plow driveways, but do they have the necessary insurance to pay for any damage they may cause? A personal auto policy will provide coverage when the vehicle owner is plowing their own driveway, but that is typically the limit of the coverage. The personal insurance auto carrier will very likely deny any coverage for a loss caused by business use of the vehicle. If the vehicle owner advertises a snowplowing service or accepts money for snowplowing, they are now a business! If they are a business, they need business insurance. To confirm, we checked with a local personal insurance agent. Their personal auto coverage specifically excludes using the vehicle while engaged in any business. It further restricts that snowplowing cannot even be done for free for someone other than the vehicle owner.

If you hire a business or contractor that doesn't have correct or adequate insurance coverage and they cause a loss, your business could be on the hook for any damage or injury caused!

Liability Limits

Along with the certificate of insurance is limits of liability. In other words, how much coverage does the contractor have? For the work they are doing, is it enough to pay for any loss that they may cause? Let’s say the contractor is a roofer putting on a new roof. When they are done, the roof leaks and damages computer equipment. Do they have enough coverage to pay for the damage? Or consider a delivery service hired to deliver a product. While doing so, they cause a serious motor vehicle accident. Do they have enough coverage?

How much coverage is enough? The answer can vary. Consult with your insurance agent to review the work to be done or the service to be hired and determine the limits of liability that you should ask for. One rule of thumb is:

  • Commercial general liability: Limits of $1 million per occurrence and $2 million aggregate
  • Commercial auto liability: At least $1 million combined single limit
  • Property damage liability*: At least $1 million
  • Umbrella: $5 million per occurrence/aggregate
*When a vendor is delivering product(s) to your customers on your behalf, their certificate should show either a transportation floater or motor truck cargo coverage.

Additional Insured

A certificate of insurance alone does not guarantee coverage or that the policy will remain in effect. Someone could present their auto insurance card on Monday and cancel the policy on Tuesday. Therefore, at a minimum ask to be notified when the policy is being changed or canceled. More importantly, ask to be listed as an additional insured on the contractor’s policy. When listed as an additional insured, you will be notified if the policy is cancelled or lapses and it also provides a much better chance of recovery if a loss were to occur. 

Hold Harmless and Indemnification Agreements

Hold harmless and indemnification agreements are becoming increasingly important in business contracts. They are elements or clauses within a contract or agreement that can work to your business’s advantage, or they can just as easily work against your business. Hold harmless and indemnification are terms that are used interchangeably, but do not necessarily mean the same thing. As with many things, the devil is in the details – or in this case, the wording.

The Dangers of a Hold Harmless or Indemnification Agreement

When properly written, the intent of a hold harmless or indemnification agreement is to impose on one party the responsibility to pay all liability, damages, costs, expenses, and even attorney’s fees for the other party to the agreement. Even if it wasn’t your fault and the other party was at fault, you may still be obligated to pay damages.

Let’s plow some more snow. A snowplow contractor is hired to plow a parking lot and salt the sidewalks. In this example, the snowplow contractor produces what they call a "standard contract" with plow time and frequency. Both parties sign the agreement. Two months later, the snowplow hits a parked car while plowing the parking lot and causes $5,000 in damage. The irate car owner wants someone to pay for their car damage, a rental car, and lost wages from work. When the claim is sent to the snowplow contractor with the expectation that they will pay for the damage they caused, they refer to the signed contract which included a hold harmless and indemnification agreement that obligated the parking lot owner to pay for any damage done by the plow driver.

Too farfetched? Won’t happen? Did you read the contract before you signed it? All of it? Did you understand what you read? Did you have your legal counsel review it before you signed it? All too often, business owners sign contracts only to find out later that they are obligated to pay for costs that they were not aware of. Alternatively, they hire a service provider, technician, or contractor without a written contract, only to find out after a loss occurs that the contractor has no insurance or assets.

What should a business owner do? Consider the following tips before signing any contract:
  • Don't sign it without reading it – all of it. This point cannot be emphasized enough.
  • A qualified legal review of all contracts is essential. Even if a contract has been previously reviewed, do it again. Liability law can and will evolve over time.
  • Contact legal counsel if the contract appears to contain any form of a hold harmless or indemnification agreement, clause, or section, or if those words are used.
  • If legal counsel has objections to the contract language but you still want to sign the agreement, make sure you understand the consequences and your obligations if a loss were to occur. This often occurs when you are a subcontractor to another larger contractor. You should only be liable for what you do, not for what others do or control. Ask your legal counsel for alternative contract language that would be more favorable to you and ask the contractor if they will accept a modified agreement.
  • Actively seek legal advice and direction on contracts you are asked to sign. While there will be fees for this service, it will be considerably less than the litigation costs, property damage or bodily injury costs that a business could be obligated to pay if a claim occurs.
Hold Harmless and Indemnification as a Benefit

A business should use written contracts with hold harmless and indemnification agreements to its advantage. The days of handshake agreements are disappearing; they may be gone entirely. When hiring a contractor or service provider, or renting or sharing space within a building, only do so based on a written agreement. The agreement should contain as much detail as necessary to define what work is to occur, what service is to be provided, and how or when it is to be done.

All agreements or contracts should be drafted with the help of legal counsel. While sample contracts are available online, there is often a disclaimer at the bottom – a disclaimer is another term used to deny liability – saying that the website and sample creator are not responsible for errors, omissions or damages of any kind if you use the sample. This doesn’t mean the sample can’t be used to create a draft, but the draft should always be reviewed by legal counsel before it is implemented.

When drafting a contract or agreement, use language, as well as hold harmless and indemnification agreements, designed to protect your business.

Consider the following recommendations for your business contracts:
  • Require being named as an additional insured on the other contractor or service provider’s insurance policy. This is very important. It serves as a basis for your liability carrier to submit a claim against the other party’s insurance when it appears they caused the loss.
  • Require that a certificate of insurance must be provided before any work begins. A certificate will show the effective and ending dates of the coverage. Have a plan to track those dates to ensure the work by the contractor occurs within the coverage period and not after. If the project is delayed and coverage has expired when a loss occurs, your business is very likely responsible for any losses.
  • When renting out space in a building you own,
  1. Rental agreements should hold you harmless for any injury or loss of the renter or their customers that was not caused by you.
  2. Rental agreements should include a notice that the renter has to obtain their own insurance and that your insurance will not cover the renter’s property or liability.
  3. Renters should always be asked to provide a certificate of insurance to prove they have obtained their own coverage. Again, ask to be named as an additional insured.
  • When a contractor is working on your site,
  1. The agreement should hold you harmless for any injury the contractor’s employees incur.
  2. The agreement should indemnify you for any action the contractor’s employees may bring against you.
  3. Contractor agreements should also indemnify you for any damage or injury caused by the contractor to your building, employees or customers.
  • When hiring a delivery service or even one driver with one truck
  1. The delivery service should agree to hold you harmless from any claims arising out of their activities in delivering the product.
  2. The delivery company should agree to indemnify you for all damages, expenses, and attorney’s fees arising out of a claim against you based on the activities of their delivery service.
  3. The delivery company should certify that they and their drivers will comply with all federal, state and local licensing and motor vehicle laws, including all traffic laws.
  4. The delivery company should be required to keep all delivery vehicles licensed and reasonably maintained.
  5. Include a cargo liability provision stating that the delivery service will be liable for any damage to your product while in transport and until safely delivered to the destination.
  • Include an independent contractor provision stating that the delivery service or contractor being hired is an independent contractor and not an employee, agent, partner, joint venture or affiliate of your business. However, when hiring an independent contractor most state worker’s compensation laws prohibit a clause where you ask or require the contractor to waive their right to compensation. This is another reason why you should consult legal advice, obtain certificates of insurance, and be named as an additional insured on contracts. This is one less problem to worry about if a loss should occur.
Summary

Certificates of insurance, hold harmless and indemnification agreements are a complex subject; we have only scratched the surface. The information provided is not intended to give legal advice or take the place of a consultation with your insurance agent or legal counsel. It is intended to highlight the pitfalls of operating without written agreements, signing agreements without a legal review, or using poorly written agreements. While more information can be found in the online risk control library or blog at societyinsurance.com, always consult with your insurance agent and legal counsel, and even your insurance carrier, before entering into any contractual agreements.

Download a pdf of this whitepaper here.

Contributors to this whitepaper include: Mike Rosenau, Society Insurance Director of Risk Control; Terry Gill, Society Insurance Director of Commercial Underwriting; Heather Friedl, Society Insurance House Counsel; Bill Bunzel, Society Insurance Vice President of Property, Auto and Liability Claims; Jim Putzer, Society Insurance Workers Compensation Claims Manager; and Tim Hoffmann, Society Insurance Risk Control Technical Specialist.