Additional Insured - Nonprofits Insurance Alliance

“In any negotiated agreement each party should be liable for the things over which they have control.”

In my previous blog, I discussed four tips for how you and your insurance broker could better work together, and one of the topics discussed was reviewing a contract with your broker before you sign to make sure there’s no problematic wording.

In recent months, one of the questions we’ve received most often from our nonprofit members and our brokers has been concerning the contracts our members are being asked to sign by their local municipalities. These contracts cover everything from work the nonprofit is doing for the municipality (i.e. family/child services, foster care agencies, etc.) to the simple use of public space for a fundraising event. Recently, the contract wording has become increasingly draconian, often pushing all liability onto the nonprofit, and in many cases, inappropriately so.

Many of the questions we get are about the indemnification clause in the contract. This clause determines how the liability flows in case of a claim against the nonprofit or against the municipality. You want to make sure your nonprofit is covered in cases where there’s a claim from an error or omission on your part. Accidents happen and things are sometimes missed, which is why you buy insurance. However, you need to make sure you’re not being forced to cover someone else’s liability because of onerous contract language. We always recommend that our members have someone with legal expertise review any contract before signing it. We will only opine on sections of the contract related to indemnification.

Indemnification Clauses

An indemnity agreement is a risk transfer mechanism (a contract) in which one party (the indemnitor) transfers risk from (indemnifies) another party (the indemnitee).

What exactly does that mean in layman’s terms? The indemnification agreement attempts to ensure that liability is assigned to the person responsible for causing that claim, or through whose negligence or omission the claim has occurred. Again, each party should be liable for the things over which they have control.

Here’s an example of a nonprofit project and a typical indemnification clause:

The city of Mos Eisley has a contract with the nonprofit Solo Foundation to provide services to the homeless to help them obtain housing. Solo meets with the clients at their office to provide job search services, financial counseling, and prescreening for city funded housing. The city requires all of its contractors to include the following indemnification agreement in the Service Contract:

“Consultant agrees to add the city of Mos Eisley as an Additional Insured and to hold harmless and indemnify the city of Mos Eisley, its officers, agents and employees for all claims, legal expenses or judgements which is caused by any negligence, liable act or omission of the consultant or those acting in the consultant’s behalf in the performance of your ongoing operations with respect to this contract.”

A good contract would have mutual indemnification wording where each party agrees to defend and possibly indemnify the other party for claims caused by their respective actions. That being said, the indemnification wording above would be considered a fair indemnification clause. We will talk about why it is fair in a bit but first we want to explain the term Additional Insured.

Additional Insured

An additional insured (AI) is a person or organization that enjoys the benefits of being insured under an insurance policy, in addition to whomever originally purchased the insurance policy (the named insured).

Here’s a real-life example:

A nonprofit hires a psychologist as a consultant to council its clients on-site once a week, in a group session. The psychologist requires, by contract, that the nonprofit add her as an additional insured on the nonprofit’s insurance policy. On the way to a meeting, one of the clients slips on a wet floor on the nonprofit’s premises and hurts their back. The client then sues the nonprofit and the psychologist as a result of the incident. As an additional insured, the psychologist would be defended by the nonprofit’s insurance policy.

So why would anyone want to be added as an additional insured? Being added as an AI helps to ensure fiscal responsibility for a claim is allocated to the party liable for that loss. Again, people should be responsible for the things over which they have control. In the case of our previous example, the nonprofit should have been in control of keeping a safe environment (dry floors). The additional insured is being covered only for claims caused by the actions of the named insured to the policy. An entity/person should only be added as an AI when there is some legal relationship between the nonprofit and that entity. In other words, if you are not being required by written agreement to add someone as an additional insured, you shouldn’t.

In some cases, the nonprofit will want to be added as an additional insured on another’s insurance policy. As an example, if the nonprofit has hired a contractor to do construction at the nonprofits location, it is a good idea to have that contractor, by way of a written agreement, add the nonprofit as an additional insured to the contractor’s insurance policy.

“Arising Out Of” vs. “Caused By”

What makes the above indemnification clause fair? Well, there are a couple phrases the nonprofit should look for and try to avoid with respect to the indemnification clause. These phrases are: “arising out of” and “sole negligence.” Here is the indemnification clause being referenced:

Now, let’s change a few words:

“Consultant agrees to add the city of Mos Eisley as an Additional Insured and to hold harmless and indemnify the city of Mos Eisley, its officers, agents and employees for all claims, legal expenses or judgements arising out of the performance of your ongoing operations with respect to this contract.”

The first version states specifically that the claim must be “caused by” the nonprofit’s negligence. This is preferable as the nonprofit should not accept liability for things outside their control. The second version is much broader in scope. It could be argued, inappropriately so, that any claim or loss that happens “arises out of” the nonprofits operations. Here is a real-life claims scenario to illustrate that point (note that the names have been changed to protect the innocent):

Good Heart Housing leases apartments and houses to ensure the availability of low cost housing for their clients. They lease an apartment from Dick. Dick requires Good Heart to add him as an additional insured. In one of the apartments that Good Heart is using to house a family, there is a fire. The fire is caused by faulty wiring that Dick knew about but didn’t fix (or tell Good Heart about).

It is clear that it was not the family’s or the nonprofit’s fault that the fire started. Should the nonprofit’s insurance (via the indemnification clause with “arising out of” wording) reimburse Dick for the loss?

Under “arising out of” scenario, Dick could argue that this fire loss should be covered under the additional insured language because the fire was “arising out of” the nonprofits actions (renting the house). Under the “caused by” wording, it is clear that the fire was not caused by the actions of our insured (or the family). It was not the fault of either that the fire started.

Sole Negligence

Now let’s discuss the concept of “sole negligence.” Here is another example of a poor indemnification clause:

The Nonprofit agrees to indemnify, defend, and hold harmless The City, its agents, employees and officers, from any and all liability, cost, or expense, including but not limited to attorneys’ fees, arising out of or relating to the performance of the work, regardless of whether caused in part by the acts or omissions of the Nonprofit. Nothing herein shall be interpreted as obligating Nonprofit to indemnify The City against its sole negligence or willful misconduct.

Essentially, this clause means that if a claim is the result of the City being anything but 100% at fault, the nonprofit will be held responsible. In other words, let’s say the City is 99% responsible for a claim/loss. The City can point to the sole negligence clause and try to push 100% of the liability onto the nonprofit. To make matters worse, it is very rare that a judge (jury) would find either part 100% liable for any claim/loss. That is why some municipalities insist on this wording. Better wording would be to suggest that indemnification for a claim will be allocated proportionally by the contribution of either party to that claim.

In summary, there are three things you would like to see in any indemnification clause for a contract you are going to sign:

You want to make sure the wording refers to claims “caused by” your actions and not “arising out of” anything. The “arising out of” wording is too broad and could lead to liability being assigned to you that is out of your control. Don’t agree to take on liability for things outside your control.
If you are agreeing to indemnify another party via a written agreement you should ask that that party agree to also indemnify you (mutual indemnification). That way everyone is liable for the things over which they have control.
You should ask that any “sole negligence” wording be removed. This type of wording will almost always lead to the indemnitor being responsible for all losses.

Lastly, it is always a good idea to have your broker review any contract before you sign it to ensure you will be compliant with the indemnification and insurance clauses.

For many nonprofits, special events and fundraisers are a huge part of what keeps operations moving forward. They raise awareness about critical issues in our communities, while simultaneously raising the funds necessary to cultivate change. Given how important special events are, and how complex they can be to execute, it’s not uncommon for nonprofits to hire independent contractors to provide products or services the day of, or in the days leading up to or following an event. Your nonprofit might choose to hire a clean-up crew or entertainment for the event, or it may need to rent a larger space to house the event itself – no matter the work contracted, it’s typical to bring on extra help. However, did you know that the actions or inactions of an independent contractor could potentially put your nonprofit at risk? In fact, if an incident is in some way caused by an independent contractor and your nonprofit is not listed as an additional insured on their policy, your nonprofit could be left holding the bag for the injury! Unfortunately, this is exactly what happened to one Nonprofits Insurance Alliance Group member, as described below.

The Claim

A nonprofit member-insured held a Bingo Night fundraiser at a local, third-party business. The contract to rent the space for the Bingo Night required the nonprofit to obtain an additional insured status for the business under its insurance policy, as well as execute a contract which included an indemnification provision, a clause used in contracts to shift potential legal liability from one party to the other.

On the night of the event, one of the guests was injured when she tripped and fell in the parking lot of the business where the Bingo Night was being held — an incident caused by an unrepaired pothole in the parking lot, as well as a parking lot light that had burned out so that the claimant could not see the pothole. The nonprofit had no control over the parking lot, nor did it have the opportunity to fix the light that had burned out, as it was not their premises to maintain.

The nonprofit’s insurance policy included an automatic extension of an additional insured status to the business for liability which was “caused by” the nonprofit organization, and because the nonprofit did not control the parking lot or the burned out light, the nonprofit did not cause the incident and it was the business owner’s own coverage which was applicable to the loss. However, the indemnification provision within the contract which was executed by the nonprofit included an obligation to indemnify the business for any liability “arising out of” the operations of the nonprofit. Because the claimant was injured as she left the event, her injury was treated as “arising out of” the operations of the nonprofit.

Lessons Learned

First and foremost, independent contractors should provide evidence of insurance coverage by providing your nonprofit with their own certificate of insurance. If the contractor is one that the nonprofit does business with regularly or is providing an essential service, the nonprofit should request that it be named as an additional insured on the contractor’s insurance policy. Whether a claim or suit has merit or not doesn’t prevent an organization from being sued, and for that reason, additional insured endorsements are vital when it comes to protecting your nonprofit. While these modifications to an existing contract between the insurance company and the insured organization may seem trivial, they have the effect of adding the name of the endorsement holder, your nonprofit, to the list of insureds under the policy, and this could save your nonprofit from a world of hurt.

It’s also essential to perform due diligence to make sure all contractors and subcontractors name your nonprofit as an additional insured, not just assuming as much to be true. Additionally, don’t assume the contractor has appropriate insurance; check that the policy limits of contractors and subcontractors are equal to or greater than your nonprofit’s so you don’t become the deep pocket.

Some nonprofits may think that contracts presented to them, such as the business rental agreement in this case, cannot be negotiated. However, all contract terms are subject to negotiation and must be evaluated to assess responsibilities and risks imposed. With respect to indemnification obligations, nonprofits must evaluate which entity is accepting which risk, whether there is appropriate insurance coverage for the risk, and whether the party with control over the risk, in our example the maintenance of the parking lot, is the one that is legally responsible.

General liability insurance coverage through the Nonprofits Insurance Alliance Group automatically provides an additional insured status to any business, if required by a contract, but only if the acts or omissions of the covered nonprofit have caused the liability. In this example, a change in the language in the indemnification obligation of the nonprofit included in the rental agreement to only accept liability “caused by” the nonprofit or its guests, rather than liability “arising out of” the event would have fixed the problem. With that language, the business owner’s own liability coverage would have been applicable to a loss caused by the business owner (i.e. poor maintenance in the parking lot), and it would have prevented this nonprofit from contractually accepting this otherwise uninsured loss. As we all know, especially when in a contract, it’s the words that matter.

If you need additional guidance, clarification, and/or assistance with additional insured endorsements, contact your insurance broker.

How Does the Liability Flow? A Discussion of Contractual Liability

Claims That Could Have Been Avoided: Why Words Matter with Independent Contractors

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