Contractors and Contracts!

Contracts and Independent Contractors

Lynn Bren, SDPAA Executive Director

Contracts and contractors can be tricky discussions to have. First and foremost, the SDPAA will ALWAYS tell you to confer with your local counsel to determine the recommended course of action. While the Pool does have resources available, we intend for those to be resources to enhance or assist the work and opinions of your local counsel, not replace them. If you’ve reached out to local counsel, here’s some quick advice that the SDPAA may offer when confronted with questions regarding contract language and Independent Contractors.

Let’s start with independent contractors. Per the IRS website, an independent contractor is one who has full control over the work. The only thing you, as the payor, have control over is the result. Simply put, you don’t have a say in how it gets done, you simply desire the work to be done in accordance with appropriate standards and meeting the result as identified in the work contract. Independent contractors are self-employed and are not employees of your entity.

Under the typical definition of a covered party, independent contractors would NOT be covered by liability coverage without special action to create that obligation. Independent contractors should be carrying their own liability coverage as part of their business operations or be prepared to self-fund the defense and settlement dollars required to resolve their claims. Independent contractors are not employees, elected/appointed officials, or volunteers. These are the types of entities traditionally covered by the liability coverage afforded, by the SDPAA, but also by commercial carriers. We caution everyone reading this article to confirm who is a covered party by reading your insurance policy or contacting your carrier representative.

Typically, we do not recommend agreeing to cover contractors. Having appropriate liability coverage to protect against third party claims is the responsibility of the person or business providing the service. By agreeing to provide liability coverage, your entity is agreeing to accept risk for which you have had no other control. You did not participate in the screening, hiring, training or supervising of any of the people who are engaged in the work being done, so why should you accept liability when they have erred?

Speaking of accepting liability, let’s talk about contracts. PLEASE have your local counsel review all contracts before signing them. Even if it is a renewal of a prior contract. Review for things like, hold harmless and indemnification language, as well as waivers of subrogation. Each of these has unique consequences that you may not be prepared to accept.

Contracts which include hold harmless and indemnification language are attempting to transfer the risk from one party to another. We often tell Members to include this language in their facilities use agreements because the goal of the facilities use agreements is to transfer the risk back to the host(s) of the various events, rather than simply accepting all third-party claims which may arise out of the use of the property by others. When hold harmless and indemnification language is included in your contracts, you may be accepting responsibility for claims which are simply outside of your control, and perhaps for things well beyond the scope of what you intend.  We generally recommend that wording such as “any and all claims” be clarified and confined to relate to those claims which may arise out of the obligation of the Member under the contract. Local counsel is crucial to identifying areas where the City may agree to be responsible for claims related to the execution of a contract, including a rental agreement.

The other common clause that we see in contracts is a request for waiver of subrogation. Essentially, they are asking you to agree to take care of any loss to your own property if something happens, even if it is their fault. When Members reach out and ask about this clause, we caution them that engaging in a waiver of subrogation via a contract may jeopardize their ability to secure coverage. By waiving claims for recovery, you have agreed to accept the exposure, even if it is the contractor’s fault, and something for which their liability coverage should respond to. We would prefer to allow for subrogation or contribution to be determined based on the merits of the incident, rather than contract language which was put in place prior to the event happening.  

At the end of the day, legal advice from your local counsel should ALWAYS be sought prior to engaging in any sort of contract for services, including rental agreements.  Liability exposures are no joke, and as trends are continuously emerging against our public entities, we want to make sure that you receive the most up to date advice.  If your local counsel needs assistance, or is unavailable, we encourage our Pool Members to reach out to the Government Practices Hotline at 888-313-0839. We also welcome Members to submit questions to our office directly, and we can also provide some comment and review. Please remember, current employees of the SDPAA are not attorneys, and do not intend to give legal advice. The SDPAA is proud to offer the SDPAA Members full access to the expansive loss control portfolio that has been complied to address these and so many other questions faced by our local governments today, tomorrow… always.