Nonprofits Insurance Alliance

members and growing

How Does the Liability Flow? A Discussion of Contractual Liability

“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:

“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.”

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:

  1. 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.
  2. 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.
  3. 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.

Managing the Risks of Workplace Romances – A Guide to Appropriate Policies

It is no secret that love and romance can blossom just about anywhere, including in the workplace. A recent Vault.com survey reported by The Fiscal Times, examined employers in a variety of industries and professions and found that a significant number of employees reported they have had, or are having, consensual romantic relationships with other employees.

These relationships run the gamut from the “random office hookup” to ongoing casual relationships, long-term relationships, and/or marriage. While it may already be obvious from a human resources standpoint, it’s inevitable that relationships like this will at some point impact the workplace.  It is, therefore, necessary to take action to ensure inter-office relationships are carefully monitored and managed, especially if the work relationship outlives the romantic one.

The Risks

A number of different and legitimate concerns flow from the existence of workplace romances, even when they’re fully consensual and in no way implicate sexual harassment, which requires different handling.  These concerns include:

  • The development of perceptions of unfair treatment and favoritism if a supervisory relationship exists;
  • Personal discomfort that other employees may have over public displays of affection;
  • The potential that if the relationship deteriorates, claims of sexual harassment will later develop;
  • Allegations of conflicts of interest, impaired business judgement, and confidentiality breaches on the part of a supervisor involved in such a relationship.

Some argue that all such relationships should be prohibited. However, if such a policy is implemented, claims of invasion of privacy or improperly interfering with the off duty conduct of the employees could result.   It is perhaps more prudent given the likelihood that these relationships do, or will, exist in your nonprofit, to create policies to discourage, yet monitor and control the effects of the relationships that do exist.

The Policies

The best place to start is with a comprehensive conflict of interest policy, which should be designed to deal with the potential negative effects of workplace relationships, particularly if it involves a supervisory relationship. Such a policy should state several important points, including:

  • Consensual romantic or sexual relationships between a supervisor/manager and an employee may at some point lead to unhappy complications and significant difficulties for all concerned, and therefore may be contrary to the best interests of the employer;
  • The employer discourages such relationships. However, if these relationships do exist, the privacy rights of the employees will be respected outside of the workplace and only conduct in the workplace will be monitored and subject to compliance with applicable policies;
  • If a romantic or sexual relationship between a supervisor and an employee should develop, it shall be the responsibility and obligation of the supervisor to promptly disclose the existence of the relationship to management;
  • Upon being informed or learning of the existence of such a relationship, management reserves the right to take all steps necessary to eliminate the conflict of interest that it, in its sole discretion, deems appropriate;
  • The supervisor must agree to withdraw from participation in any activities or decisions (including, but not limited to, hiring, evaluations, promotions, compensation, work assignments and discipline) that may reward or disadvantage any employee with whom the supervisor/manager has or has had such a relationship;
  • Displays of physical or verbal affection in the workplace are prohibited.

In addition to prohibiting displays of physical affection, employees involved in a workplace romance should be reminded to avoid communicating to other employees explicitly and/or implicitly that their relationship works to either party’s advantage. In fact, the California Supreme Court has ruled that extensive sexual or romantic favoritism, if pervasively displayed in the workplace, can be the basis of a hostile work environment sexual harassment claim (See Miller v. California Department of Corrections).

Concern that the involved employees’ relationship can make other employees uncomfortable can also be managed by the implementation of a policy that mandates that all employees act in a way that is, at all times, professional.  Many nonprofits already have these policies in place, but they can and should be revised to include that physical or verbal displays of affection are considered to be unprofessional and in violation of the policy.

Another, and perhaps the most effective way to manage the risks of these relationships is to have the employees enter into a written acknowledgement of the relationship, and committing to a number of responsibilities to avoid the risks and concerns associated with the relationship. This so-called “love agreement” should, among other things, contain acknowledgement of the sexual harassment policy and an agreement to report any change in the relationship or any non-consensual behavior that may violate the sexual harassment policy.

When Things Go Wrong

To the same extent it should be expected that consensual romantic relationships will develop in the workplace, it is to be expected those relationships will sometimes come to an end – with less-than desirable results.  When this happens, the risk that a complaint of sexual harassment will follow increases. If one does arise, these complaints should be handled like any other complaint made by an employee, which would include assuring the complainant that they will be protected from any retaliation.

At that point, the policies and agreements that have been implemented to avoid the risks will be critical to the defense of any claim that arises from the end of the relationship.

Learn More