Don’t Pay For Someone Else’s Mistakes: Understanding Contractual Risk Transfer

Common causes of third party liability losses can be traced back to inadequate contracts signed by restaurant management with their vendors. Even with legal counsel involvement, it is common to miss the fine print in the insurance language that ties the two parties together. Your insurance advisor should be reviewing your contracts to ensure that your liability is contractually transferred to the hired vendor for damages they cause.

HUB Insurance Robert Fiorito
Robert Fiorito, HUB Insurance

Contractual risk transfer is a way to share the risk so that restaurateurs are not left paying a claim for a problem caused by one of their vendors. It promotes a more equitable shouldering of the risk so that those responsible for it bear it. While procuring insurance for the business is a very common and straightforward way to contractually transfer the financial burden of risk, insurance alone is not enough to properly protect your interests.

Knowing about this sort of indemnification is one thing but understanding the nuances is another. Restaurant owners and managers should be wary of options that might be offered up under the guise of contractual risk transfer that can present significant exposure to the business.

Here are three of the most common so you know to avoid them:

Certificates of Insurance: Too many are fooled into thinking a Certificate of Insurance (COI) is a form of risk transfer. But it really is only a document that serves as a “snapshot in time,” showing insurance coverage.  Here are some of the problems with trusting it:

  • It’s too easy to create fraudulent COIs with today’s technology,
  • The policy that the COI certifies could be cancelled tomorrow,
  • If there is no additional insured endorsement, the certificate holder does not have to be notified of policy cancellation.

Even if the COI is accurate, as many are, the underlying policies could have severely limiting exclusions. As some unethical vendors and insurance brokers have been known to buy such policies to reduce costs, it’s smart to ask for the actual policies to review. And some insurers are known for selling such bare bones policies that exclude the most significant exposures.

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Additional Insured Endorsements: When a COI is issued, an Additional Insured Endorsement (AI) adds a layer of protection as it affords the certificate holder coverage under the policy, albeit with restrictions. Despite a benefit in that it provides written notification if the policy’s cancelled, the AI has pitfalls to be aware of. The biggest:

  • It may not be enforceable if there is no written contract.
  • The AI is worthless if claims aren’t covered due to exclusions in the underlying policy.
  • Even if the AI functions as intended, a vendor’s limits may be inadequate for the full extent of the loss.

Written Contracts: A written contract can provide significant protections, beyond insurance, but contracts are not without their own limitations. Consider the issues:

  • It may not include insurance provisions, or the insurance provisions provided may not be adequate for some types of work.
  • Many written agreements lack an indemnification clause (also known as a hold harmless agreement). This is important to prevent the other party from taking legal action against you for something that party caused.
  • It may be deemed unenforceable in a court of law. The written contract is in a stronger position if accompanied by a COI and an AI.

Your contractual risk transfer practices are critical to protect business from liabilities that you didn’t cause. Your best practice is to not go at it alone. Your insurance advisor plays a critical role in helping you manage your exposures. Even more critical is to have a legal counsel with expertise in the restaurant industry and legal precedents locally.

Robert Fiorito serves as Vice President, HUB International Northeast., where he specializes in providing insurance brokerage services to the restaurant industry. As a 20-year veteran and former restaurateur himself, Bob has worked with a wide array of restaurant and food service businesses, ranging from fast-food chains to upscale, “white tablecloth” dining establishments. For more information, please visit www.hubfiorito.com. For more information on HUB’s Employee Benefits practice, please visit www.hubemployeebenefits.com