How many contracts does your business enter into every year? You might have one or more property leases, equipment leases, purchase agreements, service agreements, construction contracts, work agreements and more. Although most contracts seem like routine, boilerplate documents, once you sign them, they become legally binding. Do you always know what you’re agreeing to?
At its most basic, a contract outlines an agreement between two or more parties. It has three basic parts: an offer (whether a good or a service), acceptance of that offer, and consideration, or what the buyer will exchange for the good or service. A contract is enforceable in a court of law—even an oral contract—so you will want to know what you’re signing.
- Does the contract accurately identify the parties involved, including full legal names, correctly spelled?
- Does it include a full description of the goods or services to be exchanged?
- Does it include the payment terms? You can reference and append price lists, schedules and other related documents.
- Does the agreement have a term? If yes, the contract should state beginning and end dates. If you need the product delivered or service completed by a specific date, make sure the contract says so and outlines the consequences of nondelivery (cancellation of the contract, refund of any deposits, etc.).
- Does the contract have a cancellation provision? Many contracts allow one or both parties to cancel the contract for failure to meet the terms of the agreement; some allow cancellation for any reason, usually with notice. If the contract can be cancelled for breach of agreement, does it include a grace period where the party at fault can cure the breach? Is the notice period reasonable?
- Does the contract affect your insurance program? Many contracts contain provisions requiring one or more parties to carry specific types or amounts of insurance coverage. Other contracts will increase your liability exposures and thus affect your coverage needs. Have you asked your insurance broker or risk manager to review important contracts for insurance considerations?
Contracts and Your Insurance
Many contracts contain indemnification clauses. These require the undersigned to “indemnify and hold harmless” the other party to the contract. Law.com defines indemnification as a “guarantee against any loss which another might suffer.” In other words, you are agreeing to take on liability that you would not otherwise have for losses described in the contract—sometimes even if the other party is at fault. The standard commercial general liability (CGL) policy provides broad coverage for liability you assume through a contract, unless your policy has a contractual liability limitation endorsement.
Contracts often require parties to maintain a specific type or level of liability coverage. Insurance policies and requirements have changed over the years, though, so you find many contracts with outdated language. For example, you might come across a contract requiring a comprehensive general liability policy. However, this type of policy was replaced in 1986 by the commercial general liability policy. Other contracts require a specific policy form, i.e., the 1986 commercial general liability policy, which is also out of date.
Other contracts might require you to maintain additional coverages, such as “comprehensive auto liability” insurance (newer policies are called a “business auto policy”) or “workmen’s compensation insurance.” (Would this cover working women?).
Outdated language or insurance requirements might not invalidate the contract or your liability coverage, but it can cause disputes between the parties to the contract or their insurers if a claim arises. Simply ensuring that your contracts are current can eliminate waste of money and time and aggravation.
Many contracts will require you to carry specific minimum limits on your liability insurance policy or policies. If you are entering a contract with another party, you will want to ensure you have enough coverage. The riskier the venture, the more coverage you will want. We can help you evaluate your contractual relationships and their effects on your insurance and risk management programs.