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Contractual risk transfer--definitely not harmless.

The first step in the risk management process is risk identification. One segment of risk that is often overlooked in the risk management process is the risk assumed by your camp organization in various contracts or agreements.

Experience suggests that many business owners, including camp directors/owners and managers, don't take the time they should to review thoroughly and thoughtfully the contracts they sign. While this may be understandable considering the pace of business and the volume of activity, failing to read and understand the risks and obligations assumed and imposed by a contract can lead to big trouble.

Read and Understand All of the Contracts You Sign

Risk is everywhere even in the contracts camp directors execute to use other organizations' facilities, purchase services, and rent vehicles. Sometimes the contracts and agreements have language in them that imposes certain legal obligations belonging to the other party--or contains clauses asking us to give up certain rights. Sometimes, obligations assumed and legal rights given up in contracts create circumstances adverse to your organization's interests in the future.

You've seen and heard the language. You may even use the words in your own contracts with staff or with other organizations using your facilities--maybe even with your camper families. The words are very formal and legal sounding, such as Hold Harmless, Indemnify, Exculpatory, and possibly Waiver. When you see these words in a contract between your organization and another, a "red flag" should be raised mentally, because these are the words of contractual risk transfer.

Terminology

There are basically three types of contractual risk transfer tools. The first is a Hold Harmless Agreement or Clause. The other, often used in combination with the Hold Harmless Clause is an Indemnity or Indemnification Agreement or Clause. The third tool is an Exculpatory Agreement or Clause also often referred to as a Waiver.

Hold Harmless Agreements

Hold Harmless Agreements or Clauses in contracts usually state that one party--most often the party writing or controlling the contract--be held harmless by the second party for any tort liability of the first party that arises out of the business activity referenced in the contract. The effect of this language is the second party assumes responsibility (legal liability) for the negligent acts, errors, or omissions of the first party.

The transfer of risk in this fashion may be wholly appropriate under certain circumstances and completely inappropriate in others, which makes generalizing a set of rules or parameters for directors to follow nearly impossible.

The difficulty arises out of the customized nature of each Hold Harmless Agreement. The reason one contractual risk transfer clause is acceptable and another is not is often attributable to the scope of the hold harmless provision itself. For example, some Hold Harmless Agreements attempt to make the second party responsible for every eventuality that might cause injury or damage, including acts of God. You may have seen language in contracts such as, "You agree to save (the first party) and hold them harmless from any and all liability, damages, or injuries and defend them from any and all causes of action arising out of the agreement...."--or something similar. Contractual wording like this is clearly not business friendly and should be avoided if at all possible.

Indemnity Agreements or Indemnification Clauses

Whereas, Hold Harmless Agreements involve contractually assuming another organization's tort liability, Indemnity Agreements or Indemnification Clauses define a contractual relationship where the second party agrees to reimburse the first party for damages (including settlements) and/or expenses (including attorney fees, court, and expert witness fees, etc.), regardless of which party is at fault. Indemnity Clauses and Hold Harmless Clauses often go "hand in hand" in contracts.

Exculpatory Clauses or Waivers

Exculpatory (freedom from blame) Clauses or Waivers are different from Indemnification Clauses. Indemnification Clauses represent promises to reimburse one party and make them whole, while Exculpatory Clauses involve one party contractually relinquishing a legal right--for example giving up the right to sue another party for their negligence. In chapter sixteen of the book, Legal Liability and Risk Management for Public and Private Entities, Dr. Betty van der Smissen states, "An Exculpatory Agreement is a contract which endeavors to alter tort common law, resulting in a conflict between traditional principles of tort law where the individual is responsible for one's actions which injure another person and contract law where parties have the right to define their relationship (van der Smissen 1990)."

Enlist Your Advisors Immediately

The first step to managing the implications of contractual risk transfer for your organization--after you have identified the "red flag" language in a contract--is to enlist your advisors immediately. Senior management, risk management, insurance, and legal resources should be contacted and given the opportunity to review the agreement. What should follow is a "what happens if" discussion designed to uncover the risks of financial loss to your organization if the agreement is signed without changes.

Unfortunately, experience demonstrates that many requests for a contractual review of the "red flag" language take place on second thought--occurring after the agreement has already been signed. Nothing can be done under these circumstances. Seek advice early and often. The expense will be worth it in the long run.

With early involvement, advisors may be able to renegotiate the language to reduce the risk--or offer other suggestions to transfer or avoid the risks. If the relationship is mutually desirable, this process should result in a new awareness, a new section in your risk management plan, as well as a better contractual relationship with the other organization.

Why Is This Important?

Risks exist in nature, in the facilities, and in the program where people interact with facilities and nature. These physical risks tend to be the focus of the camp risk manager. However, business risks exist as well. Business risks tend to be intangible and not thought about as risks in the same context as physical risks. This difference may be one reason why business risks are overlooked. Business risks present every bit as much potential for financial loss to the organization as more tangible physical risks. The business risk exists whether identified or not--and remains whether the director does anything to manage the risk or not.

One of the goals of the camp risk manager is constant improvement. Being able to recognize contract language as a risk factor--and having a plan to analyze it and respond to it--is just as important as having a plan to reduce risk at the waterfront. As insurance costs have been increasing in recent years, more businesses are employing contractual risk transfer as a risk management technique. Ignorance of the risk factors in contracts can lead to unpleasant, potentially expensive, un-insured surprises--and ultimately threaten the successful completion of your organization's mission.

The Challenges

Dr. van der Smissen's statement regarding the conflict between tort and contract law highlights the complexity of contractual risk transfer as a risk management tool. The complexity is increased by the fact that the laws of the individual states govern each contract. What works in one state may not work in another.

Which state has jurisdiction is sometimes also part of the contract. State laws and the decisions of their courts on the enforceability of Hold Harmless, Indemnification, and Exculpatory Agreements vary considerably. That makes it risky to borrow contractual language from other camps not in your same jurisdiction.

Insurance policies are also contracts. Unfortunately, your particular camp insurance program may not cover all of the risks and responsibilities you have assumed by contract. While your camp's general liability insurance may have a "contractual liability" coverage section, don't assume the risks your camp has assumed in contracts are completely transferred through the purchase of insurance. Chances are quite good your insurance policy will not cover all of the risks assumed in your business agreements.

The Best Strategy

The best approach when it comes to managing the risks in contracts is to maintain integrity in the risk identification process by reading all of the contracts your organization signs. To avoid assuming risk blindly, increase your organization's awareness of the "red flag" language.

Once contractual risk transfer clauses and risks have been identified, seek the best advice you can afford from management, legal, and insurance advisors just as soon as you can. If you want to maximize potential for a successful outcome, try not to bring potentially complex contractual issues to the attention of advisors at the last minute. Give them some time to analyze, evaluate, and consider the circumstances. Some research may be needed to get the best outcome. This strategy may generate some expenses, but the effort will lead to the establishment of guidelines for the future. In the end, it will be money well spent.

Before next summer, take some time to increase your knowledge and awareness about contractual risk transfer issues, implement your own strategy for managing the risks, and keep up the good work!

Reference

Van der Smissen, B. (1990). Legal Liability and Risk Management for Public and Private Entities. Anderson Publishing Company.

Ed Schirick is president of Schirick and Associates Insurance Brokers in Rock Hill, New York, where he specializes in providing risk management advice and in arranging insurance coverage for camps. Schirick is a chartered property casualty underwriter and a certified insurance counselor. He can be reached at 845-794-3113.
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Author:Schirick, Ed
Publication:Camping Magazine
Geographic Code:1USA
Date:Jan 1, 2004
Words:1546
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