Insurance Requirements in your Contract
As a tour operator, destination management company, receptive tour operator or meeting planner, you will often be faced with contracts that have extensive insurance requirements, much of those requirements sounding “all foreign to me,” unless you are well versed in insurance terminology or legalese.
Some travel businesses move forward with executing a contract with their vendors, suppliers or customers without a thorough review and understanding of the terms. However, contracts are made to be negotiated, rather than just signed as-is. The primary importance of reviewing and negotiating a contract is that the drafting party will likely put terms in the contract that are favorable to their own position. As a travel business you should always try to carefully review the provisions of your contracts and understand your obligations before signing a contract. If an obligation or provision in the agreement does not sit well, seems counter-intuitive, illogical or unfair, it is incumbent on you to push back before signing the agreement. In doing so, you may wish to propose alternative verbiage that makes you more comfortable and more accurately reflects both parties’ intentions.
This can be a very difficult task, since even the smartest of businesspeople who thoroughly read a contract may not fully understand what is being asked of them, especially when it comes to paragraphs that speak to things such as insurance and indemnity. Of course, the best practice and highest level of managing this risk is to have an attorney review a contract before you sign. However, this is not always a financially feasible practice for most businesses.
While there are potentially many different provisions in your agreements with vendors and suppliers which can be detrimental to your company, this article focuses on one area of common insurance requirements which can become problematic if not evaluated properly. Also, you may be at risk of agreeing to something within those provisions that does not align with your insurance policy. In-order-to help you better understand your contractual obligations and provide you with the fuel to confidently negotiate objectionable provisions, it is most helpful for you to understand the following in layman’s terms:
1) Additional Insured Requests:
Your company may be asked to name another company as Additional Insured. What does this mean?
The purpose of naming an entity as an Additional Insured is to provide them with insurance protection under your policy, for something that happens as a result of your operations or negligence.
However, these requests in many contracts today are seemingly overzealous. Sometimes, the party who is asking for Additional Insured status on your policy should actually be naming you as an Additional Insured on their policy. A good example would be a meeting planner who hires a company to do a fireworks display. Instead of the meeting planner getting named as an Additional Insured under the pyrotechnics company’s insurance policy, the contract requires the meeting planner to name the fireworks company as an Additional Insured in the event of an injury or fire that occurs during the event. That is an illogical request and should be negotiated out of the contract.
Another common example of this type of unreasonable request can be seen when there are venue-related activities. A tour operator plans an event at a dude ranch where a corporate customer will have 200 of its guests spend a day at the ranch with horseback riding and a barbeque. The dude ranch requires the tour operator to name the ranch as an Additional Insured. So, if a guest is thrown from a horse, charged by a bull or gets food poisoning from the barbeque meal provided, the dude ranch will potentially have insurance coverage under the tour operator’s policy. This requirement is illogical as it protects the party who may have caused the injuries or claims (the dude ranch operator), as opposed to the company that has done nothing wrong (the tour operator). As the tour operator, you are bringing customers to the dude ranch and providing a good source of income to their business. Your company should be rewarded or compensated for this, not penalized. If those customers individually visited the ranch on their own time, the individual customers would not be required to provide insurance coverage to the ranch to enjoy its activities. As a tour operator, you are supporting their business by bringing many customers to them and you should not be required to also provide them with insurance. Why should your insurance be implicated if they put a guest on a horse that has a history of bucking its riders or if the lunch that they prepare makes 50 guests sick?
This is a situation where your company should push back and advise the ranch that it doesn’t make sense. Sometimes pushing back may fall on deaf ears and they may refuse to remove that provision from the agreement. Under those circumstances, being creative with the verbiage in the contract may be your best alternative. An example of a reasonable solution may be changing the Additional Insured requirement to a mutual requirement. While you have named them as an Additional Insured on your policy, they have also named your company as an Additional Insured on their policy. Another solution could be adding language to the contract that specifies the other party will be an Additional Insured on your policy for situations that involve your operations or your negligence only.
The request for Additional Insured status makes a lot more sense when a municipality is sharing the use of their park or property for your use at no charge (with the exception of permit fees). In this particular case, the request is understandable, as they are providing their venue free of charge, and it is your company that is arranging the activities and meals for the day.
2) Primary and Non-Contributory and Waiver of Subrogation Requests:
Often vendors or suppliers take things a step further, demanding that you not only name them as an Additional Insured but also designate the coverage provided on your insurance policy as Primary and Non-Contributory (“PNC”) with a Waiver of Subrogation (“WOS”). Unless you are an insurance professional, you may not understand the implications of this request.
So, what does this mean in simple terms? If you are asked to designate your insurance as PNC, this means if both your insurance and the requesting party’s insurance apply to the same loss, your insurance will be primary, and must first be exhausted before the requesting party’s insurance will apply and contribute. WOS means if there is a loss to which your insurance applies, and your insurance company makes any settlement payments to the injured party, your insurer agrees not to pursue recovery from the requesting party, even if they are partially or fully responsible for the loss. When a party is required to add both PNC and WOS to their policy, they are agreeing with the requestor that no matter what happens and who is at fault, that the loss will be their responsibility until they have exhausted their insurance. In the examples provided above or other similar scenarios, does it make sense to you that your company and its insurer should be responsible, no matter what?
Originally, PNC and WOS were most commonly seen in commercial leases where the absentee landlord, as the owner of property, would always be vicariously liable for anything that happened on the property, even if caused completely by a tenant. Since many of the landlords via the lease passed on the responsibility of maintenance, upkeep, and guest safety to the tenant, it was appropriate for them to ask the tenant to name them as an Additional Insured with both PNC status and WOS. Over the years, it has morphed into many types of businesses requesting these insurance provisions and, in some cases, inappropriately.
So before executing a contract with these requirements, it is reasonable to have a conversation with the requesting party when it seems illogical or one-sided and to push-back on these requirements. Since in many cases the requesting party may have rigid guidelines implemented by their attorney or legal department and refuse to alter or remove these provisions, you may be forced to agree to these provisions, even if you find them objectionable.
It is important for you to understand that your insurance company is not bound by the insurance provisions of a contract between you and a third party. If your insurance company is unable to accommodate what you have agreed to, this could potentially place your business between a rock and a hard place. Accordingly, the best practice, is to consider double checking with your insurer to verify that they are able to add provisions such as a Waiver of Subrogation or Primary and Non-Contributory status for the requesting party to your insurance policy before executing a contract. Reviewing your supplier agreements and questioning provisions that make you uncomfortable is vitality important to successful risk management of your travel business.
Kenneth F. Whitman, Esq.
Senior Program Manager
Aon Affinity Travel Practice
This article is provided for general informational purposes only and is not intended to provide individualized business, insurance or legal advice. Consult with your legal professionals before taking any action based on this article. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon will not be responsible for any loss anyone incurred in reliance on or use of any information contained herein. This content was prepared using sources we consider reliable, but there is no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.