Liability Risk Shifting Involves Contract Agreements Supplemented With a Certificate of InsurancePage last modified: August 28 2022
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Does the Litigation Process Change When Liability Shifting Clauses Within Contractual Agreements With a Supporting Certificate of Insurance Document Are In Place?
When Liability Shifting Practices Are Implemented Within a Contractual Agreement Between Parties As a Form of Risk Management There May Be Implications Affecting the Litigation Process That Are Deserving of Extra-Special Attention.
Understanding How a Certificate of Insurance Document May Affect Duties of Defence and Litigation Strategy
In the business world, and more specifically the task of managing liability risks within the business world, and whether such involves large business or small business, the use of contractual liability risk shifting techniques is a common way to control or reduce liability and defence burdens by passing the burden from one party within a business relationship to another party within a business relationship.
Understanding Philosophical Fundamentals
Why Is Liability Risk Shifting Used Within Business Dealings?
Firstly, it is important to first understand why contractual liability risk shifting techniques is prudent and therefore so predominant within the business world whereas, logically and rationally, the underlying purpose and intention is completely reasonable and sensible despite that some may feel cynical and perceive that liability risk shifting involves some form of abusive legal trickery. Indeed, the reason is actually quite simple whereas the purpose, in part, is to place the burden of various risks onto the party within a transaction that is most able to control the risk. Additionally, in some circumstances, a party will be contracted for the specific purpose of controlling the risk.
Accordingly, where a party is most able to control a risk, or is hired for the express purpose or inherent purpose of controlling the risk, it is logical that such a party should reasonably assume the legal burden of the risk. With this purpose in mind, it makes sense to most reasonably minded people that the functional mechanics of contractual law be used to wisely and prudently shift certain liabilities that may exist by statute law, the common law, or other law. As a simple and common example, whereas the occupiers of premises owe statutory law duties and common law duties to persons who may enter upon those premises, and where such occupiers may outsource property maintenance to a contractor, it makes reasonable sense that the contractor agrees to perform the property maintenance as well as agrees to accept the liability risks for failing to perform the property maintenance in a proper manner.
Using the Clause
How Is Liability Risk Shifting Done?
Firstly, it is important to appreciate the context of what is actually occurring with liability risk shifting whereas some, mistakenly, interpret liability risk shifting as meaning that the liability is shifted from one party to another. This is an inaccurate understanding. Liability risk shifting merely means the financial responsibilities arising from liabilities are shifted. For example, as above, an occupier of premises may be liable per the statute law or the common law when a person suffers an injury upon the premises; however, that occupier is generally free to enter into contracts where others will agree to pay on behalf of, or indemnify, the occupier for those liabilities. Accordingly, it is necessary to remain aware that the term liability risk shifting fails to negate the legal liability that may exist; and instead, merely negates, or reduces, the financial impacts.
With that said, the answer to how is liability risk shifting done is simply by a contractual agreement or clauses within an agreement. Of course, one of the most common ways that the potential financial impacts of liability may be shifted is by the direct purchase of insurance coverage. However, whereas it is prudent to minimize insurance claims, and whereas it is prudent to shift certain liability risk burdens onto those who are in control of the risks, using contractual agreements, other than insurance contracts, or in supplement to insurance contracts, to do so is wise.
Generally, the contractual language will vary and yet the core point, regardless of the language involved, will define a particular legal risk, usually vaguely and thus broadly, and then state that a party to the contract agrees to accept the burden of defending against liability allegations as well as paying any liability awards that fall within the defined risks. The contract language may be detailed exclusively within a detailed contractual agreement or in combination with language within a contract as well as the language upon a Certificate of Insurance document.
The Contractor shall indemnify and hold harmless the Owner, its agents and employees from and against any claim for damages arising from an occurrence of bodily injury or death or the destruction of tangible personal property provided that the damages are caused by the negligence or breach of this Agreement of the Contractor or anyone for whom the Contractor is responsible in law and provided that the Contractor is given notice of the claim by the Owner within a reasonable time following the occurrence but in any event within 48 hours of the Owner first acquiring knowledge of the circumstances of the claim.
Source of Example:
Landscape Ontario Winter Services Contract
As above, using a snow plow services contract as the example, the contractor agrees to indemnify, meaning pay on behalf of, and hold harmless, meaning refrain from enjoining, the property owner for claims of liability arising out of the negligence of the contractor or breach of the snow plow services contract.
Requiring Obtaining Certificate of Insurance Document
What Are the Reasons For and Necessity of An Insurance Certificate?
Of course, where a contract clause, such as that above, imposes potential liability burdens upon a party to the contract, such as a snow plow service as per the earlier example above, it is logical to ensure that the snow plow service is actually financially capable of paying the potential liability burdens; and accordingly, proof of financial capacity usually involves obtaining a Certificate of Insurance document as verification that the party assuming the burden is protected by an insurance company that can afford to pay, if necessary.
Generally, a Certificate of Insurance document will confirm that valid insurance is in force, and may also contain clauses that supplement the primary contract. The usual supplemental clauses usually involve an additional insured clause as well as a notice clause.
The City of Toronto has been named as an Additional Insured but only with respect to liability arising out of the operations of the Insured for which a permit, license or agreement has been issued by the City of Toronto.
The Commercial General Liability policy(ies) identified above shall protect each insured in the same manner and to the same extent as though a separate policy has been issued to each but nothing shall operate to increase the limits of liability as identified above beyond the amount or amounts for which the Company would be liable if there had been only one Insured.
If the policy is canceled or changed in any manner, for any reason, during the period of coverage as stated herein so as to affect this certificate, thirty (30) days prior written notice (ten (10) days if cancellation is due to non-payment of premium) by registered mail will be given by the insurer to:
Source of Example:
City of Toronto - Standard Certificate of Insurance Document
The purpose of the additional insured clause is to impose obligations upon the insurer of the party accepting the risk. Generally, the obligations imposed upon the insurer involve the requirement to, but only within the limited scope of liabilities arising from the operations of the party accepting the risk, to treat the party that is shifting the liability risk burden as if the two parties are both clients. Accordingly, the party that becomes an additional insured obtains limited rights including the right to report claims directly to the insurer of the primary insured just as if the additional insured was the primary insured. With this said, and such is notable whereas confusion and concern sometimes does arise, an additional insured is without rights to instruct the insurer to make coverage changes and without the right of access to information irrelevant to the reasonable needs of an additional insured, such as premium details or other information that would breach the privacy of the primary insured.
The purpose of the notice clause is to impose obligations upon the insurer of the party accepting the risk to provide advisement to the additional insured of any cancellation of the coverage as certified within the Certificate of Insurance document whereas it is prudent, necessary, and reasonable, that the additional insured be informed of any disruption to the assurances as provided.
Why Should a Litigator Understand Contracts That Involve Liability Risk Shifting?
As a litigator of legal disputes that may involve contractual agreements that include liability risk shifting, and therefore affect the process as well as the rights and duties of the parties involved in the process, including the duties to provide a defence within legal proceedings and provide indemnity for liability awards, it is necessary to understand and recognize the concepts and principles as described herein. By recognizing these concepts and principles as potential concerns, and especially by recognizing when legal claims may be drafted in such a way as to trigger the insurer of other parties that are contractually connected to a client or other party, the allegations within legal claims, referred to as pleadings, may be crafted in a manner that is particularly favourable to a client. As a simple example, and returning to the snow plowing service mentioned above, where a client may own lands and structures, among other things, that are damaged by the operations of the snow plowing service hired by a neighbour, such as damage due to the piling of snow, the run off of water from snow melt, the chemical effects of salt or de-icers, it may be desireable to plead various concerns of negligence within a legal claim rather than solely the tort of nuisance whereas doing so may trigger the involvement of the insurances of both the neighbour and the snow plowing service hired by the neighbour. Of course, this is just one example among the many thousands of possible situational scenarios as to why these understandings are important.
As a litigator, for the best service to clients, it is important and necessary to understand common liability risk management processes that may involve contractual agreements that fall into dispute or that may be called into dispute depending upon the wording of legal claims. The rights and duties of a client are best addressed when the contractual obligations of clients, or those who are adverse to clients within litigation, are well understood. Understanding the reasoning for, and practical application of, liability risk shifting enables clients to receive the best possible legal advice, assistance, and representation.