Page 34 - Feb2019_BarJournal

BarJournal INSuRANCE LAW

JULY/AUGUST 2015
fEaTUrE Tricks of the Trade

for Shifting risks to Insurance

companies in Business Deals

BY MATTHEW A. CHIRICOSTA & K. JAMES SuLLIVAN

ne of the key components not to give these provisions short shrift If you wait until you need that insurance before
of negotiating a contract when drafting them. Rather, painstakingly confirming your counterparty’s compliance,
between two companies lay out whatever terms you can reasonably and it turns out that your counterparty failed
is the allocation of risk. impose on the other side, such as the exact to fulfill its insurance-related obligations, then
OAlthough risk is typically type of insurance policy they must purchase there is no way the insurance company will
allocated directly to one or the other of the or maintain, the specific dollar amounts agree to retroactively place the coverage because
deal parties, the use of insurance serves a of policy limits (and possibly maximum insurance companies do not insure known losses.
critical risk-allocation function as well. For deductible), the quality of insurance
example, a landlord owner of real property may company used (often informed by ratings 3. Beware the Certificate of Insurance
contractually require its commercial tenant to services such as A.M. Best), and specific Head Fake.
buy property insurance to cover high-value covenants to fund premiums, renew policies So how to prove compliance? Just get a Certificate
losses, knowing that the tenant would not have timely, and comply with policy provisions of Insurance (COI), and you are golden, yes?
the financial wherewithal to fund such losses. such as notice provisions. Key is to make sure Nope. A COI is worth only the paper on which it
By way of another illustration, if the subject the language is clear and easily understood. is written. All it does is summarize an insurance
matter of a contract involves services or products policy. It is not part of the policy, and it does not
that pose risks of bodily injury or property 2. Just Because It Says So Doesn’t Make It So. create any insurance coverage rights. Indeed,
damage to third parties, then one of the parties Prove it. Just because your client’s counterparty most COIs have language on them that reads
might contractually mandate that the other signs a contract agreeing to put into place something to the effect of:
party put in place a commercial general liability certain insurance protections does not mean THIS CERTIFICATE IS ISSUED AS
(CGL) insurance policy to cover such accidental that it actually fulfilled those obligations. No A MATTER OF INFORMATION
harm that may someday occur. This article worries, right, because if they didn’t, then ONLY AND CONFERS NO RIGHTS
shares some insurance-related strategies for you’ll sue them for breach of contract? Actually, UPON THE CERTIFICATE HOLDER.
lawyers negotiating corporate and commercial yes worry. The whole purpose of imposing THIS CERTIFICATE DOES NOT
transactions on behalf of their clients. insurance requirements is to have a backstop to AFFIRMATIVELY OR NEGATIVELY
ensure that any losses or liabilities your client AMEND, EXTEND OR ALTER THE
1. Clearly Spell Out the Expectations for faces can be effectively shifted to someone COVERAGE AFFORDED BY THE
Your Counterparty’s Insurance Coverage. willing and financially able to pay. Chances are POLICIES BELOW. THIS CERTIFICATE OF
When negotiating a deal for your client, it that if you are looking to the required insurance INSURANCE DOES NOT CONSTITUTE
is easy to assume that the party on the other to cover a loss, it is because your counterparty A CONTRACT BETWEEN THE
side would do the common-sense thing cannot or is unwilling to pay. ISSUING INSURER(S), AUTHORIZED
and have adequate insurance to cover the Because your client’s contract is with the REPRESENTATIVE OR PRODUCER, AND
risks faced by that party. But what did Mom counterparty only, and not the counterparty’s THE CERTIFICATE HOLDER.
and Dad used to tell us about assuming insurance company, that insurance company Rather, the sought-after insurance coverage
things? In fact, sometimes companies are has zero obligations to honor that contract. It rights are created by the terms of the insurance
woefully underinsured for various key only must honor the agreements into which it policy itself, often by way of an endorsement.
risks. To best protect your client in deal enters with its insured, which in this case is Thus, make sure to request a copy of the policy
negotiations, if you have the bargaining your counterparty, not your client. or the endorsement that proves compliance.
leverage to impose insurance requirements Thus, it cannot be overstated how important Curiously, parties rarely make this ask, so
on your counterparty, make sure you it is to get proof of compliance with insurance brace yourself for grumbling and pushback.
include contract provisions specifically clauses at the outset. Indeed, this must happen Don’t let them bully or shame your client into
setting forth those requirements. Take care before a loss or third-party claim materializes. “taking their word for it” or simply accepting a
34 | Cleveland Metropolitan Bar Journal clemetrobar.org