Your company’s contracts may be exposing you to unnecessary risk. When your company does business with subcontractors, suppliers and other third parties, a poorly worded contract could shift liability to you for losses that you have no control over. To shield your company from losses stemming from third-party acts and claims, your attorney must include proper indemnification provisions in your contracts.
Vicarious Liability Scenarios That Could Hurt Your Business
It’s been said that no man is an island, and the same idea can apply to businesses. Your company does not operate alone. In addition to customers and clients, your company likely has vendors, suppliers and other business partners. You depend on these third parties to perform responsibly, but if anything goes wrong, you could be left on the hook for the losses.
There are many ways in which this could happen:
- A subcontractor violates local labor or environmental regulations, leading to fines and lawsuits.
- A supplier produces a defective product that causes property damage or bodily injury and triggers recalls and lawsuits.
- A vendor misses a key deadline, resulting in major delays and putting contracts in breach.
Vetting your business partners can go a long way in avoiding problems, but it may not always be enough. Losses and claims may still arise, and you need a strong contract in place to deal with them.
Risk Management Through Indemnification Clauses
A solid contract is an essential foundation for any business relationship. The inclusion of carefully crafted indemnification clauses will ensure that your company does not take on more risk than is necessary.
When assessing your contracts with your lawyer, consider the following issues:
- An appropriately worded indemnification clause will clarify who is responsible for what damages and can protect you from losses or claims caused by negligence, misrepresentations or other acts on the part of a third party.
- Indemnification clauses should be written to cover both foreseen and unforeseeable risks.
- State and local laws may control or restrict the enforceability of indemnification clauses. Contracts should be written to comply with all applicable laws.
- Insurance coverage for all parties is essential. Verify that the other party has adequate coverage, and stipulate insurance requirements in the contract. Check policies for exclusions and to determine whether additional insured status extends coverage to the other party. Also consider whether a waiver of subrogation clause, which could prevent an insurer from attempting to recover money for claims paid, is needed.
- Ensure that all contracts are reviewed by your own attorney. Contract language can be dense, and precision is essential. An attorney should check contracts, indemnification clauses in particular, for strong risk management practices.
Need assistance? Learn more about Higginbotham’s contract review services. And remember, your first line of defense is consulting your own attorney.