10 Contract Liability “Best Practices” for Owners or Managers of Real Estate

For property owners and managers, having third parties in facilities is part of the normal course of business. Therefore, no big deal, right? Wrong. Every time a contractor works within a property, the opportunity for risk increases. A slip resulting in injury. A spark causing a fire. A drip that becomes a flood. Who is responsible? The answer relies heavily on the contract. That means setting up the relationship and taking steps to transfer risk starts at the very beginning. We compiled the top contract liability best practices to help real estate owners and managers mitigate risk and keep their properties safe.

#1 Require that legal counsel review all contracts, including lease and service agreements

Signed contracts do not always provide the final word. When a claim or loss occurs, the dispute may head to court. Attorney reviews ensure the contract is legally binding and able to withstand court scrutiny. Lawyers look at contract fairness, identify and rectify potential loopholes in the language, and ensure the agreement clauses provide sufficient coverage to the issuing party. In addition to project deliverables, the contract also must specify what is required of the third party to engage in work. This should outline the different types of insurance policies a contractor must carry and the duration of those coverages. For example, requiring the standard Commercial General Liability (CGL) policy for demolition contractors might not be sufficient. Because of the nature of their work, a Contractor Pollution Policy (CPL) also may be necessary. Legal reviews help identify contractual gaps based on the working relationship and rectify them before anyone signs on the dotted line.

#2 Use a standard contract rather than a special or manuscript contract

Think of contracts on a spectrum. At one end is the custom manuscript agreement. These contracts tailor to each third party with language specific to the relationship. At the opposite end sits the standard form agreement. These more common contracts cover the basic provisions necessary for operating within the industry. Custom agreements offer the benefits of creating a unique fit for the work of each contractor and can address nuances better. However, with property owners and managers likely working with many vendors, drafting and negotiating a new contract for each one is slow and inefficient. The non-standardization also makes managing the contracts more difficult. In comparison, by generally using the same language across agreements, standard contracts eliminate the scope of negotiation and speed up the bidding process. Standard contracts also help establish a body of case laws over time that disputing parties can reference to resolve conflicts.

#3 Have your company added to a contractor or tenant’s insurance policy as an additional insured

The goal of risk management is to keep risk closest to the parties likely to create it, which is generally third parties. As an additional insured, property owners and managers become insurable under a contractor or tenant’s policy. The endorsement protects against claims from work performed by the named insured for the additional insured. Should a loss occur at least partially caused by the third party, that insurance policy bears the financial responsibility for both the named insured and the additional insured. The contract should specify which upstream parties must be added as additional insureds. Insurance coverage should include workers’ compensation, general liability and umbrella insurance, where applicable.

#4 Update the contract with indemnification and hold harmless clauses

Contracts should include indemnification and hold harmless language that benefits property owners and managers. Under this requirement, the third party agrees to indemnify, or financially restore, the property owner or manager to its condition prior to a loss and replaces the upstream parties as the financial source for legal liability. The hold harmless clause releases those entities from responsibility for the acts performed by contractors, tenants, and other third parties. Hold harmless agreement language should clearly state the lower tier’s responsibility for claims, damages, losses, expenses, or other cause of action.

#5 Add a waiver of subrogation

Insurance companies use subrogation as a strategy to recoup money paid toward a claim by legally pursuing payment from another party affiliated with the loss. An example might include a contractor’s employee falling off a ladder provided by the property management company and sustaining an injury. Adding a waiver of subrogation to a contract prevents that contractor’s insurer or other downstream party from seeking reimbursement on a settled claim from the property manager or other upstream entity. Waivers of subrogation provide additional protection to the upper tier and reduce opportunities for litigation between an operation’s parties.

#6 Obtain certificates of insurance from all contractors and tenants

Having your own insurance policy is not enough. Everyone working within a property should be covered as well. Certificates of insurance (COIs) serve as proof that a third party has correct and adequate coverage in place complying with the contract’s requirements. Third-party COIs also are important to your own insurance premiums. During annual audits, underwriters review COIs. Failure to have them available or findings of third-party noncompliance will drive up the cost of your company’s premiums for assuming more risk—or could prompt an insurer to cancel the policy altogether.

#7 Track COI effective and expiration dates

Make providing a current certificate of insurance a contract provision. COIs include when a policy becomes effective and when it expires. Those dates should match the duration of a contractor project or tenant lease. However, COIs only represent a snapshot in time. After providing a COI, the third party could cancel their coverage and the property manager or owner likely would never be notified. That is why reviewing COIs for all active contracts on a monthly basis is best practice. Companies should create a process for requesting new COIs prior to their expiration date as well. A loss occurring even 24 hours after a third-party policy lapse will leave upstream entities holding the bill.

#8 Check policy limits and the quality of the insurer

Include required coverage thresholds for third parties in the contract. A $500,000 coverage limit is not sufficient for a $1 million dollar project. Limits listed on the COI should meet or exceed those of the upstream entity. When financial gaps exist, the third party should purchase umbrella insurance. Otherwise, loss overages go against a property owner or manager’s policy. Also know that not all insurance companies are alike. Far too many lack the financial solvency for covering major claims and losses. Contractually require that contractor and tenant insurers hold an A- or better rating by AM Best, a top-tier credit rating agency for the insurance industry.

#9 Require contractors be responsible for all subcontractors

Many working relationships do not include only two parties. Let’s say an owner is renovating their property. They hire a general contractor who then subcontracts out smaller projects for painting, roofing, and plumbing. Now the project just took on another level of risk from those downstream parties. Write the agreement with the contractor to require its responsibility of the subcontractors. In general, the same rules should apply in the contract between those two parties as between the property owner and its contractor. Specify insurance coverages and policy limits, require COIs, and mandate safe working conditions.

#10 Specify primary and excess coverage

When permissible, contracts should have a provision requiring that the contractor or tenant’s insurance is primary and the building owner or manager’s is excess. This is important because one party is not always solely responsible for a claim. A primary and non-contributory endorsement specifies usage order when multiple policies get triggered by the same event. The clause should state that the downstream party’s policy is primary to the loss without seeking contribution from the upstream entity’s policy. This ensures the third party’s policy applies in full before pursuing any financial contribution from the property manager or owner.

Manage the Risks of Real Estate Better

Risk is part of life, but managing it unchecked is not. Your contract is a primary defense against the everyday risks of operating the business. And while the contract language is important, the action your team takes to capitalize on that language is paramount. That’s why you need a partner by your side. myCOI exists for one reason: to help you handle the everyday tasks of managing certificates of insurance and protecting your company against underinsured claims, costly litigation, and failed audits. The software is an easy-to-use, cloud-based solution developed and supported by a team of insurance professionals and built on a foundation of insurance industry logic. We automate the certificate of insurance communication process and ensure you remain protected. Learn more through a product demo or sign up for our newsletter.

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