HOST SCHOOLS CONTRACTUAL LIABILITY RISK TRANSFER: A RISK MANAGEMENT TIME BOMB OR FREE INSURANCE!

James Favor, CRM, CIC, James R. Favor & Company LLC

Like a time bomb, unknown adverse contractual liability risk transfer exposures represent an increasing and very significant cost exposure for fraternities and sororities.  Contracts and risk transfer are daily issues in the Greek community.  They are best addressed when your legal counsel, risk management and insurance representatives and underwriters work in concert.  Failure to identify and subject contractual liability and risk transfer exposures to loss control is certain to lead to unanticipated and increased retained and insured losses with resulting higher claim costs and insurance premiums.

An obvious and ominous trend is that increasingly via “Recognition”, “Approved Housing” and other contractual agreements, Host Schools are seeking to impose Contractual Indemnification and Additional Insured obligations that require Greek organizations to defend and indemnify the school for the school’s own negligence!  “Host Schools” represent another attractive target and deep pocket for plaintiff’s attorneys.  Several suits related to fraternity incidents have recently been filed against schools alleging the school’s own liability for negligence including negligent supervision and failure to enforce hazing prohibitions.

Difficulties in managing contractual liability risk transfer exposures with “Host Schools” include: 1) the school’s strong position of leverage, 2) your lack of any control over the school’s actions and risk management practices and 3) no or poor communication about these agreements and exposures from your local chapters and house corporations.  These factors may result in your being totally unaware of your contractual liability risk transfer obligations and missing the opportunity to limit or control these exposures and costs.

The time bomb explodes when suit is filed and the school pulls out a previously unknown contractual risk transfer of liability and tenders the claim to you demanding that you or your insurance company provide the school with Defense and Indemnity.  You may have to pay these costs directly as part of your insurance program’s retained or deductible costs.  If paid by your underwriter, the loss costs will certainly be reflected in your loss ratio, and future premiums.  The potential for totally uninsured losses also exists.  Liability and litigation results are at best uncertain and adverse results are a very real possibility.  Especially if you are responsible for defense and indemnity, the schools may be reluctant to settle these claims resulting in a prolonged and very expensive trial and appeal process.

Contractual Liability coverage, at least to some degree, is afforded in most insurance policies.  However, insurance policies can and do differ dramatically in the scope of coverage they provide.  Standard I.S.O. Form policies contain no clear “Duty to Defend” the indemnified party.  They also impose various other difficult conditions such as: 1) the insured and indemnified party must be named in the same suit, (in most of the recent suits, separate suits have been filed against the schools and the Greek organization), 2) the obligation to defend must be contained in the same contract as the indemnification obligation, 3) no conflict exists between the insured and indemnitee, and 4) the insured and indemnitee ask the insurer to conduct and control the defense and agree to use the same legal council.  Unless all conditions are satisfied or Additional Insured status is provided, the defense costs incurred are considered as “Damages” and reduce the amount of coverage available to pay the claim.

Any reduction of coverage available to resolve claims will lead to uninsured losses for groups that do not maintain excess liability coverage if defense and claims settlement costs exceed the reduced coverage limits.  For groups that carry excess liability coverage this erosion of underlying coverage will lead to greater excess liability losses.  While infrequent, excess liability insurers that suffer losses generally respond quickly to with higher costs and greater restrictions and even withdrawal from the already limited market for this coverage.

When more that one insurance policy may apply to a claim, the respective underwriters typically share the claim’s cost.  While schools already have their own liability insurance, their coverage is commonly subject to significant deductible levels or self-insurance.  To reduce their self-insured or deductible costs, the schools are also increasingly requiring that they be afforded Additional Insured status that provides “Primary Coverage”.  “Primary Coverage” essentially provides free insurance for the schools, eliminates any cost for the schools, reduces the Greek organizations coverage, and forces the Greek organization or its insurer to bear the total costs of the school’s defense and indemnity.

IF THE GREEK COMMUNITY IS FORCED TO DEFEND AND INDEMNIFY THE SCHOOL’S FOR THEIR NEGLIGENCE, GREEK LOSSES AND INSURANCE COSTS WILL LIKELY INCREASE DRAMATICALLY.  THE ENTIRE GREEK COMMUNITY AND ITS UNDERWRITERS SHOULD TAKE A UNITED POSITION AGAINST ACCEPTING ANY RESPONSIBILITY FOR A HOST SCHOOL’S NEGLIGENCE.

We offer the following recommendations to assist you in dealing with your contractual risk transfer exposures.

1) Risk management begins with identification of exposures.  Communicate with your Chapters and Housing Organizations and attempt to determine the extent of any adverse Host School contractual liability risk transfer exposures.

2) Remind your entire organization at least annually that they are not authorized to sign any agreement on behalf of your national organization.

3) Stress the importance and potential costs of assumed risk in urging your Chapters and Housing Organizations to determine if any contractual liability risk transfer agreements exist, and to promptly provide copies to your risk management staff, legal counsel, insurance representatives and underwriters.

4) Advise your entire organization and your Host Schools that in order to assure coverage under your insurance any indemnification or Additional Insured agreements must be reviewed and be acceptable to the parties concerned, your legal counsel and underwriters BEFORE IT IS SIGNED.

5) Use your website and direct communication with Host Schools to advise them that your insurance will not provide any coverage for the school’s negligence.

6) Use your underwriters as an ally to eliminate current and avoid any potential future contractual liability risk transfer obligations for a Host School’s negligence.

7) Review your insurance coverage with your insurance representative, legal counsel, and underwriters to determine the scope of coverage provided for any contractually assumed liabilities of others.

8) Be sure you know if your insurance always pays for contractually assumed defense and indemnity costs of others in addition to your coverage limits or if restrictions and qualifications exist that could result in those costs reducing the limit of your coverage.

Our long standing advice is that the Greek Organizations should also use every opportunity to incorporate positive contractual risk transfer into their risk management programs. When applied for your benefit, effective contractual risk transfer is a very positive risk management and loss control technique for Greek organizations.  Contractual risk transfer has been proven very effective in minimizing Greek risks and is particularly valuable for independent contractors such as those providing event hosting, security, and alcohol services.  After all, effective contractual risk transfer is the cheapest insurance you will never buy!

Considerable additional information on these subjects is available without cost on our website www.jrfco.com.

EDITOR’S NOTE

Whether or not a university can contract away liability for its own negligence is not at all certain.  Requests to agree to indemnify against the institution’s own negligence should, where possible, be avoided.  However, in some instances, colleges and universities have made indemnification or hold harmless agreements or being named as an additional insured, a prerequisite to recognition.  Women’s groups, in particular, have been very aggressive over the years in analyzing these university agreements or requests by universities for some form of indemnification, hold harmless clause or additional insured status.  Where necessary, in order to ensure recognition, they have been able to provide additional insured status to the host institution and that has typically met that recognition requirement.