Tricks of the Trade: Indemnification Provisions
Have you ever wondered if when you sign a contract you’re compromising your insurance coverage? It might sound crazy, but that could be exactly what’s happening. When signing a contract with a key supplier or client of your manufacturing facility, there could be very little room to negotiate, but before that contract is signed, it’s important that you review it with your insurance broker.
Nearly all contracts have what is called an “indemnification” provision. This basically states, in certain cases, you agree to pay a third party. One example is when a third party selling your product wants you to indemnify them, should that product cause injury to someone. Indemnification is a standard way for parties to “divvy” up costs. But more and more they’re used to try and get one party, typically the one with less bargaining power, to pay for any sort of potential calamity.
A standard general liability policy will have “contractual liability” coverage included, but this is limited and only applies to specific types of contracts in specific circumstances. States and municipalities will also have their own rules regarding what type of indemnification agreement may or may not be allowed. One example of this is the state of Illinois’ “Kotecki” rules. In certain contracts this rule allows an employer to waive protections under the Illinois Workers’ Compensation system. This can ultimately lead to an employer being responsible for a large settlement they otherwise wouldn’t have to pay. However, many insurance policies won’t pay for this type of settlement since you “voluntarily” waived legal protections you had that would have prevented the payment.
This type of situation just goes to show how language that might be skimmed over in a contract can rope you into a million-dollar claim you may not be insured for. While all contracts should be thoroughly reviewed by legal counsel, always make sure to give your insurance broker a chance to discuss coverage with you. Doing so could mean the difference between a claim that is paid and one that isn’t.
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