What to Watch For In Security Contracts

You work hard to land new client contracts every day. When you are forced to hand back a client contract (because your insurance company or risk management department would not agree to insurance and indemnification language) - do you feel like you just lost your company a big sale? You actually might have saved your company from a devastating lawsuit that is not covered by insurance.

Let's first examine the age- old question: Is it better for me NOT to have a written contract with my client? The answer is GENERALLY NO. Written contracts are recommended because:

  • Agreed duties are clearly stated
  • Supervision and control of security officers is stated (agency theory discussed later)
  • Nature and number of security officers is stated
  • Contractual obligations are understood by all parties

Each point made above provides affirmative defenses in the event of a claim against your company. As a security provider it is very easy to be brought into just about every kind of litigation that occurs at a client location. It is the contract or service agreement and your execution of the agreement that allows for early dismissal of liability.

However, when a written contract contains onerous terms (e.g., overly broad indemnification insurance requirements, liquidated damage provision, etc.), you may be better served by not signing the client's form and by addressing issues such as duties, posts, and number of guards. Before making these decisions consult your legal adviser.

With a clear understanding of why written contracts are important, let's examine what can happen to increase or decrease your liability.

Historical risk management tells us that noninsurance risk transfer has long been important to effective risk control. If your client selects risk transfer, a decision is made whether to transfer the risk to its insurance company or to a third party contractor - YOU. It is at that point that you decide how much you wish to put your company in HARMS WAY. The events of September 11, 2001 changed the insurance market - and that has forced many of your clients to assume large deductibles and secure selfinsured programs. This shift away from guaranteed insurance cost is concerning. Is it logical for you to assume that your clients who are now self-insured will spend more time looking to YOU for reimbursement and defense of an occurrence? Logic says YES!

Your client has hired you to protect themselves from certain risks - bodily injury, property damage and financial loss (also called "occurrences"). If you fail to prevent an "occurrence" you may be liable for the loss or perhaps a third party on your client's property even when the occurrence is caused in part by the acts of your client. It all depends on the wording of your contract with them. Remember, once you sign an indemnity, that provision may determine responsibility for losses for years to come.

A standard Security Contract is available from the law firm of Ingber and Ingber. It is highly recommended that it become your preferred document for all client contracts.

In the event you are required to sign your client's standard form contract, be on the lookout for the following phrases:

  • Indemnity, Indemnification or Hold Harmless
  • Additional Insured
  • Waiver of Subrogation
  • OCP - Owners Contractors Protective
  • Term of agreement

The following is an examination of each of these terms:

Indemnity, Indemnification or Hold Harmless: An indemnification clause, also known as a "hold harmless" is an agreement whereby one party (the "Indemnitor") agrees to protect and indemnify the other party (the "Indemnitee") from certain damages, such as loss of property, injury to persons, including third person that arise from negligence, carelessness or intentional acts or omissions by certain people or entities (e.g. guards, guard company or customer).

If at all possible, remove any reference to an indemnity in favor of your client from the contract without an indemnity provision, common law provides that a party is responsible for its negligence. If you agree to indemnify your client you are agreeing to defend and reimburse your client for certain occurrences at their location.

When a client absolutely demands an indemnification clause in his contract with you, we have determined three levels of indemnifications:

Limited: You agree to indemnify and hold harmless your client in the event a claim, demand, or suit is brought against him as a result of your direct negligent acts while performing agreed upon duties. From your perspective, this would be the most preferable indemnification clause, because you assume responsibility for only "DIRECT" acts of your employees. You would not be responsible for the active or passive negligent acts of your client; nor would you be responsible to individuals other than your client. An additional provision would be to limit the indemnity to the "insurance proceeds" only.

Intermediate: You agree to indemnify and hold harmless your client if a claim, demand or suit is brought against them for an occurrence caused in whole or in part by your negligence, including the contributory negligence of your client. This addition to the contract adds significant liability to you. As a result you could be responsible for acts that your employees had no direct involvement in. Your client might be equally liable, but because of this provision you are legally required to indemnify your client.

Broad: You agree to indemnify and hold harmless your client for all liability arising out of an occurrence, even if caused by intentional acts of your employees or if your client is solely responsible. By signing a broad form hold harmless agreement you are exposing your company to enormous risk. In most instances, insurance policies include contractual liability. However, most insurance policies do not agree to indemnify your client for their gross or sole negligent acts. Moreover, under common law your liability covers the company's negligence and the negligence of your employees. By accepting any greater liability, your client is receiving a significant benefit for which you should be paid.

The Bottom Line: You must first make sure your insurance policy extends coverage to any indemnification clause you agree to in a client contract. If the indemnification or hold harmless provision is broader than the language in your insurance policy, be aware that you are self- insured in the event of a claim.

Also make sure any client indemnification clause does not extend to uninsured occurrences - such as pollution, asbestos, theft, mold and even terrorism in some cases.

Ask yourself "How can I reasonably expect my employees to perform, what can I reasonably be expected to do in the event of an occurrence at my client location". If you are concerned about your liability, you can bet your insurance company is going to have a concern as well.

Additional Insured: In most cases, additional insured status goes hand in hand with the indemnity agreement. There are several reasons why- and the most significant is because of the immediate impact it has on your insurance policy.

Your client may seek additional insured status under your liability insurance policy in order to protect himself - in the event that the hold harmless agreement proves to be unenforceable. For example, some states have statutory restrictions on the permissible scope of indemnification or the circumstances of a particular loss, which may conflict with, and thus void, the terms of the hold harmless agreement. When unable to obtain indemnification under the hold harmless agreement, your client can look for coverage directly under your insurance policy if he has additional insured status.

Your client may also feel that he requires additional insured status for the following reasons:

  • To protect his own policy limits or self- insured retention
  • To guarantee a defense provided by indemnitor
  • To back up a potentially unenforceable hold harmless agreement
  • To obtain coverage not available under his own insurance program
  • To avoid subrogation

The Bottom Line: Additional insured status requires that you and your insurance company both indemnify and defend occurrences tendered (given) to you by your client. It is essential that you limit additional insured status in the same way that you limit indemnification language. In every circumstance possible, follow the limited, intermediate and broad strategies discussed above.

You must then make sure your insurance policy extends coverage to any additional insured clause you agree to in a client contract. If the additional insured status provision is broader in its language than your insurance policy, you must be aware that you are self insured in the event of a claim.

Also make sure any additional insured status provision in favor of your client does not extend to uninsured occurrences, such as pollution, hazardous or nuclear waste or release, asbestos, theft, mold and even terrorism in some cases.

Waiver of Subrogation A subrogation clause gives an insurer the right to take legal action against a third party responsible for a loss to an insured for which a claim has been paid.

A client that asks for a waiver of subrogation is not necessarily concerned about you or your insurer suing him. He is concerned about litigation that comes when one of your employees is injured while working at his location. Although you pay workers compensation, your employee may opt to sue your client separately. Although worker compensation limits the potential recovery against you, there is no such limit on lawsuits against your customer. Your customer may look to shift his liability entirely to you through a broad indemnification or partially through the waiver.

The complication starts when your insurance company (looking to recoup a portion of workers compensation benefits paid to the injured employee) imposes a lien against the award.

In states where waiver of subrogation is enforceable your client has a right to request and obtain one. It is up to you and your insurance company to determine if and to what extent a waiver of subrogation is acceptable.

The Bottom Line: Waiver of subrogation is not easily enforceable by your client. It is essential that you only agree to waive subrogation as the named contractor. You do not have the right to demand that your injured employee not sue your client if they are injured at a client location.

It is essential that you limit subrogation clauses in the same way that you limit indemnification language. In every circumstance possible, follow the limited, intermediate and broad strategies discussed earlier.

You must then make sure your insurance policy extends coverage to any subrogation clause you agree to in a client contract. If subrogation provisions are broader than language in your insurance policy, be aware that you are self insured in the event of a claim.

You must also make sure any waiver of subrogation does not extend to uninsured occurrences, which include pollution, asbestos, theft, mold and in some cases, even terrorism.

Owners and Contractors Protective Liability OCP policies are usually not required in today's market, because of changes to traditional insurance policies available to contractors. However, OCP policies still pop up every now and then.

An OCP policy is an actual insurance policy that you purchase for your client. The policy is written in your client's name. Your client is the named insured. OCP policies are not always available in certain markets. Based on the limited number of insurance companies that offer OCP insurance, the cost can be prohibitive. In some cases, coverage is simply no longer available due to the increase of various forms of additional insured status.

The Bottom Line: A contract that requires an OCP insurance provision should be removed - and replaced with indemnity-additional insured provisions.

Term of Agreement

Agency Theory Most contracts include a statement that you and your employees are an independent contractor, and that in performing those services you are not acting as an agent for your client. This language theoretically insulates your client from liability for your acts and omissions and those of your employees. It also protects you and your client from claims of joint employer ship that can result in both you and your client being responsible for claims brought by your employees (e.g., union issues, benefits, pension).

The problem of agency is generally unintentionally caused when the client takes control over your employees at its site. A director of security may begin assigning duties and tasks to your employees, which may cause injury (e.g., a guard hurts his back Friday morning when placing the security directors golf clubs in the trunk of his car). The guard collects worker compensation from your carrier and sues the client. Depending on the contract language you may have to defend and indemnify the client. You may also have to defend and/or indemnify for actions brought by third parties against your client resulting from a guard's action taken at your client's direction, (e.g., a patron sues for false imprisonment after the customer directs your employee to detain a suspected shoplifter.) This independent contractor issue is an example of good contract language being corrupted by poor practices.

This agency - or master servant - relationship also exists between you and your employees, including your guards. Under common law as a company you are liable for your own acts and omissions, negligent and intentional. As an employer you also are liable for the consequences of your employee's negligence. You may also be responsible for the intentional wrongdoing of your employees if that wrongdoing can somehow be related to your negligence in hiring, training or supervising the security guard.

Duties and Responsibilities When there is an occurrence, the first thing one often does is look for a way to place blame. If a person on your client's property is assaulted, that person may sue your client for negligent security. The client may turn around and sue you claiming you were responsible for the security plan or your security officers failed to perform their duties. To defeat such claims, it is important to note that unless otherwise agreed upon in writing, your services do not include an analysis of security requirements. (Note: many guard companies offer a free "security survey" as part of a marketing strategy.) This can expose the company to serious liability if not expertly handled. Some examples include: three-year historical crime grid, analysis, and a lighting and obstruction evaluation. It is also critical to set forth posts and hours. And if you have agreed to prepare or provide post orders, make sure they exist, that they are at the post and that the guards assigned to the post read the orders.

Term of Contract Many client contracts provide a term of one or more years and then give the client the unilateral and exclusive right to cancel at any time. This right must be mutual. Your interest in terminating a contract may be the result of unexpected costs, unforeseen risks, or your client not paying your bill. With this in place, you will be in a position to cut your losses, but remember: you should not simply walk off a job. Adequate notice (seven days) should be provided so that the client can find a replacement vendor and you can avoid lawsuits for losses incurred by terminating service without reasonable notice.

Conclusion In every contract that requires indemnity, indemnification, hold harmless, OCP or waiver of subrogation, it is essential that it be clearly stated that the limitation applies "only to the extent covered by insurance proceeds". This paragraph in your contract will protect you and your company from potentially uninsured claims in which your client requests indemnification.

When your client transfers the risk to you, your next step is to transfer that risk to an insurance company by purchasing insurance protection. Rate and premiums charged by your insurance company depend upon your historical claims experience, type of clients, internal controls and type of contractual obligations. Failure to maintain positive claim experience and reasonable contracts can force insurance companies to charge higher rates to cover expected claims.

As a security provider, you provide your clients with the manpower to discourage or deter injury, damage or financial loss - but there is no way to guarantee that a loss won't occur. That is why it is essential that you protect your company - by carefully reviewing all client contracts.


About the Author Mike Lehner is a principal of The Mechanic Group, Inc. an insurance underwriting agency that provides insurance, risk management and bonding products to over 1,500 security, investigation and electronic security companies nationwide.

Michael Lehner, Principal
The Mechanic Group, Inc
One Blue Hill Plaza, Suite 530
Pearl River, NY 10965
(845) 735 0700

About the Reviewer The Law Firm of Ingber and Ingber reviewed this document at our request. Cliff Ingber can be reached at (203) 629 6170. ABOUT MR. INGBER ESQ: Mr. Ingber's practice is dedicated to the representation of security, investigation, pre employment screening and related businesses throughout the United States and Europe. The firm regularly represents clients in acquisitions; contract matters; labor and employment cases; and licensing issues. Mr. Ingber is admitted to the New York Bar, the United States Supreme Court and the U.S. Federal District Courts for the Eastern and Southern Districts of New York. The practice is national in scope.

Clifford J. Ingber, Esq.
Ingber & Ingber
292 Madison Avenue
New York, New York 10017
(212) 685-9818

335 Greenwich Avenue
Greenwich, CT 06830
(203) 629-6170

The materials contained in this brief have been prepared by The Mechanic Group for informational purposes only. The information and opinions contained in this brief are largely general in nature and are not intended to be a comprehensive study, and should not be treated as a substitute for specific professional advice concerning individual situations. Readers should not act upon any material in this brief without first seeking expert professional advice. The Mechanic Group makes no representations or warranties with respect to any information in this brief, all of which is provided strictly without warranty of any kind. The Mechanic Group hereby expressly disclaims all warranties with regard to any information in this brief and accepts no responsibility which may arise from reliance on information contained in this brief.