The ABCs of Indemnity Agreements and Additional Insured Endorsements
An indemnity agreement secured by an additional insured endorsement is a risk transfer tool that can help insulate your business from potential risks.It's 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.
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's 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.
Additional Insured StatusWhen 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.
Understanding Your CoverageUnderstanding the terms of the contract, the extent of liability assumed in the indemnity agreement, and the insurance requirementsincluding the coverage provided or afforded by the additional insured endorsementare 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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