By: Robert J. Scullin, ARM, Vice President, The Graham Company
Apartment ownership and management can be a risky business. The property itself, the resident’s usage of your property and your operations of the facility all involve risk. Apartment owners and managers protect themselves from this risk by purchasing insurance. While insuring your business is mandatory, the actual cost of your insurance program is still largely in your control. The most effective way to reduce your business’s exposure to loss and the corresponding costs associated with it is to leverage another party’s insurance policy—a policy that won’t cost you money. In risk management terms, we call this contractual risk transfer.
All standard commercial insurance policies provide the ability for one party in a contract to assume the tort liability of another party. While the specific policy language can vary, your vendors and service providers have the ability to assume your liabilities, thereby reducing your risk profile and insulating you and your insurance program from losses. This is important because your insurance cost is based on four criteria:
- The quality of your property
- The quality of your operations
- Your actual loss performance
- An underwriter’s assessment of your opportunity for losses
Transferring your risk of loss to your vendors and service providers by using their insurance policies is effective in reducing both your actual losses and the potential for loss as seen by an underwriter. It is an extremely cost-effective way of protecting your assets. Implementing a consistent and thorough contractual risk transfer process should be top of mind and a well-implemented procedure for any apartment owner or manager.
You probably consistently obtain certificates of insurance from your snow removal contractors, landscapers and other contractors who work on your properties. That’s not enough; in fact, it does nothing at all to protect you. A good contractor risk transfer process contains three key elements:
- Consistent insurance requirements
- Specific indemnification wording in your contracts
- A requirement for additional insured coverage from your vendors
Having consistent insurance requirements is the first piece of the puzzle. It’s not enough to have your vendors show proof of workers compensation coverage, general liability, automobile coverage, etc. You should have a process that dictates minimum limits of insurance that you are willing to accept, minimum insurance company financial ratings and maximum deductibles.
Your broker should be able to advise you on the minimum acceptable insurance levels based on your specific operations and risk appetite. Once determined, these requirements should be used religiously. A good start is to require minimum limits, such as:
- Workers Compensation: Statutory limits
- Employers Liability: $1,000,000
- General Liability: $1,000,000 per occurrence, $2,000,000 aggregate
- Automobile: $1,000,000 per occurrence
Respect the “A”
You should require all your vendors to show proof of insurance with “A”-rated carriers as determined by the rating agency AM Best. A rating of “A” is still deemed to be “Excellent” by the rating agency and can be acceptable, depending on the size of the insurance company. Many of the big names in the industry have been rated an “A-” and are still viewed to be well-run operations with a healthy balance sheet. We typically require companies to be rated “A – VII” by AM Best or better in order to protect our clients’ interests.
Indemnify: The contractual Obligation
Indemnification and additional insured coverage are two separate routes to the same objective: getting someone else to pay for a loss when it happens. Indemnification is exactly what it sounds like: a contractual obligation of another party to indemnify you in the event of a loss. There are three levels of indemnification:
- Broad Form indemnification is where another party indemnifies you even for your sole negligence. Some states allow this for certain types of contracts.
- Intermediate Form indemnification requires the other party to indemnify you in all instances except when you are solely negligent. This is the most common form found in most contracts in New Jersey.
- Limited Form indemnification requires indemnification only to the extent of the negligence of the other party. In a way, it’s not indemnification at all since both parties are agreeing to be liable only for their own negligence.
Additional insured: The missing link
While indemnification is a required piece of an effective program, it could leave you chasing after the assets of your vendor. The missing piece that ties all of this together is requiring your vendor to name you as an additional insured on their insurance policies. This way, you can tender a loss directly to your vendor’s insurance company. Additional Insured coverage is very valuable, but you have to be wary that the coverage you expect to get is actually provided for in your vendors’ policies. There are many different standard Additional Insured Endorsements in use. Some provide coverage only for ongoing operations, for completed operations or for something that may not have anything to do with the scope of your contract with your vendor.
Consult with your insurance broker and put language in your contracts that requires additional insured coverage be provided, or via a standard form number that you spell out in your contract. This is the only way to know you’re protected in the event of a loss.
A good contractual risk transfer process takes forethought, control and discipline. While it will take some work to set up, it shouldn’t really cost anything. Implemented correctly, it will pay big dividends.
About the author: Robert J. Scullin, ARM, is vice president-sales manager at The Graham Company. He is responsible for business development, mentoring new employees and managing a team of service professionals. His educational background includes a bachelor’s degree from The Wharton School of the University of Pennsylvania and graduate studies at Penn’s Liberal Studies Program. Scullin also holds an Associate in Risk Management (ARM) designation.