Risk Report: November 2012

with Henriott Group, Inc.

NOVEMBER 2012

Workplace and Risk Management topics aimed at business owners, managers and other organizational leaders.

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Risk Transfer: the insurance game of “Hot Potato” 

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The ABC’s of Indemnity Agreements & Additional Insured Endorsements Additional Insured Status

Henriott News & Updates

ALERT!!!

MOD Changes 

Understanding PrimaryExcess Split

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Upcoming Changes

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How This Affects You

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New photography display

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Save the Date! December 19th - Business After Hours

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B y R ic k D a vi s , C I C , C R M CEO at Henriott Group, Inc.

One area where businesses “stick their neck out” frequently is entering into contracts, purchase orders, leases and similar agreements. Examples include the purchase and installation of equipment, hiring subcontractors, outsourcing certain business processes/services and many more. While entering into agreements like this is a common business practice, assessing the risk placed on the business as a result of these arrangements is not as common.

The concept of Risk Transfer really can feel like a game of hot potato, but there is a rationale behind it. From a risk management standpoint, we don’t want to assume liability or exposure for someone else’s actions if we don’t have to. It’s through the review and negotiation of contracts and agreements, along with supporting insurance documentation, that this important “game” of risk-transfer is played out. Perhaps an example might help bring this point home: Company A outsources part of its manufacturing process to Company B who applies a special coating or paint to Company A’s component which is then incorporated into Company A’s final product. A month later, Company A begins to receive complaints about the performance of their product and determines the cause of the defect to be the coating process performed by Company B. Without proper Risk Transfer (including a hold harmless/indemnity agreement, additional insured status and a certificate of insurance on file), Company A could be on the hook for the claim, defense costs, time and hassle of resolving the claim, etc.

Examples like this demonstrate the importance or good risk-transfer practices to ensure that your organization is attempting, whenever possible, to limit your exposure to things you can control. We’ve included below some key points with regard to contractual language you will likely come across as you enter into agreements with third parties as well as some info on Additional Insured endorsements. More to come next month on how to win, or at least not lose, at the game of insurance “hot potato”!

Risk Transfer |

Rick Davis

The ABCs of Indemnity Agreements & Additional Insured Endorsements Understanding your business’s risk

exposures is the cornerstone to managing them. Whether your business relies on outside vendors to provide goods and services, or you’re a provider of goods and services to your clients, you should be aware of how to take contractual precautions to protect your business against potential losses or damages. An indemnity agreement secured by an additional insured endorsement is a risk-transfer tool that can help insulate your business from potential risks.

It is a common practice to enter into contractual agreements with those involved in a project to formalize the terms and responsibilities for all parties.

These contracts often include an indemnity agreement, also known as a hold harmless agreement, as a means to transfer the risk of future losses or damages from one party to another.

There are basically three kinds of indemnity or hold harmless clauses typically contained in contracts.

1. Limited - obligates the indemnitor (the party paying compensation) to hold harmless the indemnitee (the party receiving compensation) only for the indemnitor’s own negligence.

2. Intermediate - obligates the indemnitor to hold harmless the indemnitee for all liability except that which arises out of the indemnitee’s sole negligence.

3. Broad form - obligates the indemnitor to hold harmless for all liabilities, including the indemnitee’s negligence.

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To support the terms of the indemnity agreement, the contract will often include insurance requirements.

These spell out the insurance required by the various parties entering into the contract. It is common for one party to include another as an additional insured under its Commercial General Liability (CGL) policy. For example, owners or general contractors of construction projects commonly require those who are actively involved in the project operations, such as subcontractors, to sign a contract and name them as an additional insured on their CGL policy to limit their liability for damages caused by the subcontractor.

Carefully review the indemnity agreement prior to finalizing the contract to determine the extent of your company’s liability. Once the scope is understood, you may want to negotiate the terms to limit your exposure.

The application and enforcement of an indemnification agreement does, however, depend upon the statutory and common law of the jurisdiction in which enforcement is sought.

Risk Transfer |

Rick Davis

Additional insured status When reviewing the insurance requirements section of a contract, pay particular attention to the additional insured requirements. There are numerous additional insured endorsements. The specific additional insured endorsement, required in the contract, must be reviewed in order to determine the scope of coverage.

The Insurance Services Office (ISO) released new additional insured endorsements in 2004.

The intent of the endorsements is to provide liability coverage for additional insureds (typically the general contractor or project owner) with respect to damages caused by the named insured (subcontractor). The endorsements do not provide coverage for the additional insured’s sole negligence, but they can provide coverage for the additional insured’s contributory negligence. Make sure that the actual additional insured endorsement satisfies contract requirements.

What’s in a name?

Don’t be confused— additional insured coverage is different than “additional named insured” coverage. An additional named insured usually is an affiliate of the primary insured. You will not be able to add or be added as an additional named insured.

If this is part of the contract, it should be removed.

Understanding your coverage Understanding the terms of the contract, the extent of liability assumed in the indemnity agreement, and the insurance requirements—including the coverage provided or afforded by the additional insured endorsement—are critical to minimizing future liabilities and exposure to losses.

Keep in mind, the liability assumed in the indemnification agreement of the contract can be broader than the coverage provided under the additional insured endorsement. A comparison of the two should be done to determine what is covered by insurance and what is not.

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The National Council on Compensation Insurance (NCCI) recently announced its plan to make a change in the experience rating formula. The primaryexcess split point will be increased over a three-year transition period. The first stage of the transition will take effect with each state’s approved rate and loss cost filing on or after Jan. 1, 2013.

Understanding Primary-Excess Split In the experience rating process, each loss is divided into a primary and excess portion. Currently, the first $5,000 of every loss is allocated as a primary loss, with everything over and above considered an excess loss. In the experience rating process, each loss is divided into a primary and excess portion. Currently, the first $5,000 of every loss is allocated as a primary loss, with everything over and above considered an excess loss.

Primary losses are used as an indicator of frequency, and are counted in full as part of the mod calculation. Conversely, excess losses receive partial weight in the mod calculation. This means that primary losses affect the mod more than excess losses do. The rationale behind assessing primary and excess loss amounts is that “severity follows frequency,� or in other words, an organization that displays a continual pattern of loss has an increased chance of a severe loss in the future.

Thus, a company with a large number of primary losses will have a higher mod than a company with the same amount of losses split between primary and excess.

How Does This Affect My Organization?

Whether your mod increases or decreases will depend on whether you have an above or below average number of losses under the split point. If most of your losses are under $5,000, you are likely to see a decrease in your mod. If many of your losses exceed $5,000, you should prepare for an increase in your mod.

Analysts expect the split point change to result in a wider range of mods across each industry. Debit mods (those over 1.0) will tend to gain points; credit mods (those under 1.0) will more than likely see a decrease in points. Furthermore, many employers will see their minimum mod, or loss-free rating, decrease.

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The Latest …

Henriott News & Highlights We are happy to tell you about our new artist, who is currently displaying her work in our office. Her name is Cheryl Kaldahl of Kaldahl Fine Art. Based on scientific research, Kaldahl has created an extraordinary series linking the colors used in a painting to specific musical tones and emotions., thus simultaneously creating an original painting and its musical score for a specific emotion/mood.

If you stop by our office, you can scan her QR code and listen to the music while viewing her collection.

Stay Up-To-Date With Us Check out our website blog series for reallife claims or lawsuits that we hear about in our work and make us sit back and say…C’Mon Man…Really?!

Did you know that we also issue monthly reports for Employee Benefits and Personal Insurance? For a preview of these, click the following links!  

Live Well, Work Well inSIGHTS

If you would like to subscribe to either of these, simple send an email to info@henriott.com and specify which you are interested in receiving!

Business After Hours On December 19th we are hosting Business After Hours for Greater Lafayette Commerce. If you’re in the area, please stop by from 57pm.

Cheryl Kaldahl, our featured artist, will be demonstrating her unique technique of painting to music. Please stop by to visit us and experience Cheryl’s work.

Henriott Group’s Milestone Risk Management program is aimed at helping your company lower its Total Cost of Risk.

Want to learn more? Talk to your Henriott professional for more information about this proprietary process.

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