Insurance brokers need to be more confident and proactive about reading their clients’ business contracts and discussing insurance-related issues arising from them, an insurance and risk management consultant says.
Karen MacWilliam told Insurance Business that brokers too often defer to the advice of a lawyer when it comes to analyzing business contracts. She wrote about the issue recently in her ‘Commercial Break’ column in Alberta Broker magazine.
She said the biggest risk for brokers’ clients comes from poorly-drafted contracts. Brokers will most likely be called upon to take a look at business contracts related to leases, probably in 60% of cases, she said. Brokers will also review construction-related contracts involving tradespeople doing work in someone’s home or for the city.
“When I speak to brokers on this topic, many folks seem terrified at the prospect that they could be expected to examine a business contract and offer related advice to clients,” MacWilliam said.
“We are not lawyers,” she says senior brokers have told her, to which she replies: “Lawyers are legal experts, but brokers are insurance and risk experts. That’s our job.”
Many brokers are not clear with their clients about whether contract analysis is part of the service they offer, MacWilliam said. “I’ve seen dozens of ‘disconnects’ in which the client thought the broker had reviewed the contract, but the broker just used it to fill in the blanks on a certificate of insurance,” she said.
MacWilliam suggested that the broker write up a service agreement – or engagement letter – that specifically lists “analyzing contracts for risk and insurance implications” as either an included or excluded service. This will clearly indicate in advance the scope of services the broker has agreed to provide.
Also, brokers should spell out to clients what they need in order to provide their clients the best possible advice. For example, clients may provide the contract to the broker on very short notice, which doesn’t allow the broker enough time to give a reasoned opinion about the insurance terms.
“Educate your clients to provide you with copies of contracts prior to signing them,” MacWilliam said. “It’s kind of tough to change the language in a document that’s already been executed.”
Brokers should look carefully at the indemnification provisions of the contract. These spell out under what circumstances the client will have to pay the other party.
“If there are obvious risks that are clearly uninsured, advise the client,” MacWilliam said. Typical examples may be faulty workmanship, environmental contamination, fines, and breaches of statutes, among other things.
“Distinguish between what’s uninsured from what’s uninsurable,” she said. “Coverage may be available for some of the risks not currently covered, and you should make reasonable efforts to provide quotations.”
