1. Indemnity

WHAT IS IT?

An indemnity clause, also known as a hold harmless agreement, allocates risk among the different parties involved in a contract. If you and any other stakeholders are sued by a third-party, the indemnity clause will specify who’s obligated to cover the losses and when, protecting the parties from harm—or “holding them harmless,” so to speak—in the process.

WHAT’S THE RISK?

While some indemnity clauses are more evenly split and only allocate risks to the party whose actions—or inaction—may have led to a lawsuit, others might be more one-sided and place the responsibility squarely on one party; this is known as a broad form agreement. That means even if the other party is 100% at fault or if the reason you’re being sued is unrelated to your work, you’d still be contractually liable for paying the damages.

Here’s an example: your company manufactures energy-efficient machinery for a client. As part of the agreement, the client requires you to hire a particular contractor for installation. Unfortunately, the contractor doesn’t install to your specifications and after a few months, the equipment malfunctions, injuring some nearby workers. Since you hired the contractor and you have a broad form agreement, you’ll have to pay for any loss of revenue or injury claims even though you weren’t at fault. Depending on the wording of the clause, your contract may even require you to cover the other party’s defense fees during the legal investigation process before your liability has even been determined.

Think your insurance will cover you? Most Professional Liability Insurance policies are only intended to respond to claims caused by the negligence of the insured company—not the liability you take on for another party. So if you end up having to cover another party’s legal expenses, your insurance may not reimburse your losses.

RELATED: Professional Liability Insurance: What is it, What’s Covered, and What’s Not?

WHAT CAN YOU DO?

Review your contracts carefully to get a sense of what risks you’re taking on and what you’re transferring to others. Look out for any overly broad language that might shift the blame onto your shoulders, like defending against “all reasonable claims” as opposed to “all claims or allegations.” Contract terms should address everyone’s concerns; however, each party should only be responsible for covering damages caused by their own mistakes, misconduct, or negligence.

Make sure the indemnity clause stays within the parameters of your insurance policy. Remove any obligations to legally defend the other party and clarify who the agreement applies to. For example, if you’re supplying products, you shouldn’t have to cover anyone hired by the purchaser or project owner, like a subcontractor. See if you can put a limit on the amount you have to pay out and within what timeframe if a claim arises well after your involvement has ended.

2. Limitation of Liability

WHAT IS IT?

A limitation of liability clause caps the amount of risk you can legally take on in a contract with another party. If there’s a breach of contract, like a mistake or a delay, or if the other party suffers a loss, a limitation of liability will keep you from having to pay too much—or at all—by outlining out what you can (and can’t) be sued for, how much you owe the other party, and the period of time during which you can be sued. Without this clause, there’s virtually no limit to how much a party can recover from you during a lawsuit.

WHAT’S THE RISK?

While effective, limitation of liability clauses aren’t always legally enforceable. For a clause to hold up in Canada, the terms must be explicitly worded and applicable to the surrounding circumstances, fair and reasonable, and compliant with all public policies. If a clause is deemed vague, unconscionable or unduly advantageous to one party, or in conflict with an overriding policy, it won’t hold up in court. However, if you’re signing a contract with a company outside of Canada, the situation could be very different.

If a limitation of liability clause is thrown out, it’s usually because of the language used; the terms are ambiguous and unclear, leaving the clause open to contractual interpretation. Say your company designs specialized blades for a wind turbine, but your client doesn’t perform the necessary upkeep to maintain them. As a result, they’re unable to generate enough power. Unless your contract specifically limits liability for poor maintenance, your client could sue you for lost revenue from defective products.

WHAT CAN YOU DO?

When setting limits, take the time to identify and understand your liabilities: any risks and the chances of them occurring, your business relationship with the other party, the nature of the contract, and more. A limitation of liability clause should establish:

• Losses you’re willing to cover with no limit (like death, injury, or fraud);
• Losses you’ll cover up to a certain limit (and what that cap should be); and
• Losses you won’t cover at all (i.e. business disruptions or lost profits).

Limits should be capped to a reasonable amount based on how much you’re able to pay, the potential damage a risk could cause, and the amount of available insurance coverage you have and whether or not you’ll be reimbursed for a loss. Additionally, make sure you’re not accepting liability for any consequential or liquidated damages.

And lastly, be transparent. If you didn’t get a limitation of liability clause, don’t give one. But if you do, make sure the other party is aware of, understands, and agrees to the terms to avoid any issues in court.

3. Scope of Services

WHAT IS IT?

A scope of services, or scope of work, is a brief description of the work to be performed. It outlines your client’s goals and objectives, the services you and your team will provide, how much the job will cost, and how long it will take. A solid scope is crucial to set expectations about the nature of a contract and ensure everyone is on the same page from the get-go.

WHAT’S THE RISK?

A poorly defined scope can lead to scope creep—when you and your team are asked to perform work that isn’t part of your original contract. Unauthorized tasks can quickly create a backlog in workflow and extend the lifespan of a project, leading to project delays, cost overruns, payment disputes, and even more mistakes if people are scrambling to catch up.

Scope creep usually happens when two parties disagree on what work should be delivered or what the overall cost will be. For example, you’ve been hired to install LED lighting into a client’s smart building. As the project progresses, new technology becomes available that incorporates intelligent control LED lighting. Since the two products cost the same, the client asks you to replace the previously agreed-upon technology with the new lighting, believing that there will be no change to the contract value; however, you’ve already pre-purchased the previous lighting and don’t have the ability to return or reuse it without a loss. The cost to make the change will eat up all your profits and more.

RELATED: Sustainable Risk Management for Net Zero Buildings

WHAT CAN YOU DO?

Be as detailed as possible to eliminate any potential grey areas. Your scope should include: the project overview, key deliverables and milestones, responsibilities, timelines, cost, compensation methods and schedules, and any other important technical details necessary for you to perform services.

In addition, be sure to specify what you will do, as well as what you won’t do, including the basic services you’ll provide, any extra services that you may offer, and associated costs. If needed, implement a section on constraints or contingency items to account for changes throughout the course of the project.

Lastly, use consistent terminology; avoid industry jargon and abbreviations to ensure maximum understanding, especially if your client does not operate in the Sustainable & Clean Technologies sector.

A clear, carefully written contract is one of the best tools in your arsenal to lower the chances of a lawsuit and save yourself from financial, legal, and reputational harm. You might not be able to address every situation or circumstance, especially in an industry that’s continuously evolving, but the more you plan and prepare, the lower your risk will be overall.

For more guidance, seek legal counsel when drafting and reviewing contracts. And for good measure, consult with an insurance broker, like PROLINK, that specializes in the Sustainable & Clean Technologies industry—they’ll know exactly what kind of contractual risks have led to financial hardship or insolvency in the past.

To learn more, connect with PROLINK. With over 40 years of experience, we have the expertise to help you navigate industry trends and adopt a proactive approach to risk management to control your costs long-term. Our dedicated team of risk advisors will:

• Identify exposures based on your unique business needs and operations;
• Share what best practices others in your industry are taking and advise you accordingly;
• Conduct a robust assessment of your existing insurance policies to detect any coverage gaps;
• Align you with tailored insurance, risk management, and alternative risk transfer solutions that evolve as your risks evolve, no matter how quickly the industry moves.

To learn more about your exposures—and how you can protect yourself—connect with PROLINK today!