When your nonprofit hires a contractor to perform certain duties, an agreement should be in place to not only assign them a task, but to also assign liability if that contractor fails to perform the enumerated duties.
Some nonprofit organizations hire professional property managers for a reason. They expect them to oversee operations, identify hazards, coordinate maintenance, respond to problems, and keep the property running safely and efficiently.
But when a loss occurs, the nonprofit’s insurance policy is often the first place everyone looks.
That shouldn’t always be the case.
If a property manager was hired and contractually assigned responsibility for a particular task, the owner should take a close look at whether the associated risk and liability were appropriately assigned as well.
A Contract Assigns Responsibilities, but it Doesn’t Automatically Transfer Liability
Consider a property manager who is contracted to be responsible for identifying maintenance issues and promptly rectifying them.
But then, repairs aren’t done, tenant complaints are ignored, and the work that is done is often deficient. Before long, a known hazard that had gone unaddressed leads to someone getting injured.
Now there’s a claim. But who is responsible?
Who bears responsibility may depend on a variety of factors, such as the facts, the contract, or that jurisdiction’s law, but one thing is clear — who bears responsibility is a question that should always be addressed before a loss occurs, not after.
While a property management agreement may define the responsibilities of the property manager, simply putting those duties in a contract does not mean the risk has been effectively transferred, or that your nonprofit is protected if something goes wrong.
When a claim eventually occurs, the property owner may find that the very risk they believed they had delegated has instead landed right back in front of them — and potentially on their insurance policy.
That’s where contractual risk transfer becomes critical.
A contract should clearly establish who is responsible for performing the work, who has control over the activity, and what happens when that responsibility is not fulfilled.
Your Insurance Policy is Not the Default Solution for Your Contractor’s Failure
Insurance is designed to respond to covered losses and is an important part of a comprehensive risk management program.
But insurance is not a replacement for properly assigning risk.
When a nonprofit hires a professional contractor, it is relying on that contractor’s skill and expertise. If the contractor is responsible for certain tasks or decisions, the contract should clearly say what the contractor is expected to do and what happens if they do not do it properly.
If the property manager is contractually responsible for identifying or correcting a condition and fails to do so, your nonprofit’s insurance should not necessarily be the first — and only — line of defense.
Review the Agreement Before a Claim Happens
Effective risk transfer requires more than simply asking a contractor for a certificate of insurance.
If a contractor controls a task, the contract should make clear that they are responsible for doing it properly, and for addressing the consequences if something goes wrong.
Before entering into any agreement, or renewing one, consider whether the contract addresses:
- Clear responsibilities: Say exactly what the contractor is expected to do, who is in charge of each task, and who is responsible if the work is not done.
- Responsibility for losses: Include language that explains when the contractor may be responsible for costs, claims, or losses connected to their work.
- Contractor insurance requirements: State what insurance the contractor must have and what coverage amounts are required before they begin work.
- Access to the contractor’s insurance coverage: If appropriate, require your nonprofit to be added to the contractor’s insurance policy for risks connected to the contractor’s work.
- Reporting and documentation: Spell out what records, reports, notices, and follow-up steps are required. These details help protect your nonprofit and make expectations clear.
Always have your legal counsel review statements and terms about indemnification, additional insureds, and responsibility for losses since these vary by contract and jurisdiction.
Your insurance is a backstop — not a substitute for effective risk allocation.
If You Assign the Responsibility, Assign the Risk
Don’t wait until a claim occurs to discover that the party responsible under your contract wasn’t contractually positioned to manage the consequences of failing to perform.
The goal isn’t to transfer every possible liability to a contractor — that isn’t realistic and might not be appropriate.
Rather, the goal is to intentionally allocate responsibility to the party best positioned to control the risk, and to make sure the contractual and insurance arrangements support that allocation.
The goal isn’t to avoid insurance coverage, it’s to make sure the right party bears responsibility in the first place, while your insurance remains available for legitimate covered losses.
This post is intended for general information only. It does not guarantee coverage, a defense, or any specific outcome.
Coverage depends on the specific facts and on the terms, conditions, and exclusions in your policy. Contact your insurance broker or agent to determine the appropriate levels of coverage and follow your policy’s claims reporting procedures if an incident may involve a claim.
This does not constitute legal, medical, financial, or professional advice. In an emergency, contact local emergency services first. Any risk management practices mentioned are general suggestions and may not apply to every nonprofit. Follow all applicable laws, licensing rules, and reporting requirements.
