Contractual Risk Transfer – Definitely Not Harmless

Risk Management

by Ed Schirick

The first step in the risk management process is risk identification.
One segment of risk that is often overlooked in the risk management process
is the risk assumed by your camp organization in various contracts or

Experience suggests that many business owners, including camp directors/owners
and managers, don't take the time they should to review thoroughly and
thoughtfully the contracts they sign. While this may be understandable
considering the pace of business and the volume of activity, failing to
read and understand the risks and obligations assumed and imposed by a
contract can lead to big trouble.

Read and Understand All of the Contracts You Sign

Risk is everywhere even in the contracts camp directors execute to use
other organizations' facilities, purchase services, and rent vehicles.
Sometimes the contracts and agreements have language in them that imposes
certain legal obligations belonging to the other party — or contains
clauses asking us to give up certain rights. Sometimes, obligations assumed
and legal rights given up in contracts create circumstances adverse to
your organization's interests in the future.

You've seen and heard the language. You may even use the words in your
own contracts with staff or with other organizations using your facilities
— maybe even with your camper families. The words are very formal
and legal sounding, such as Hold Harmless, Indemnify, Exculpatory, and
possibly Waiver. When you see these words in a contract between your organization
and another, a "red flag" should be raised mentally, because
these are the words of contractual risk transfer.


There are basically three types of contractual risk transfer tools.
The first is a Hold Harmless Agreement or Clause. The other, often used
in combination with the Hold Harmless Clause is an Indemnity or Indemnification
Agreement or Clause. The third tool is an Exculpatory Agreement or Clause
also often referred to as a Waiver.

Hold Harmless Agreements

Hold Harmless Agreements or Clauses in contracts usually state that one
party — most often the party writing or controlling the contract
— be held harmless by the second party for any tort liability of
the first party that arises out of the business activity referenced in
the contract. The effect of this language is the second party assumes
responsibility (legal liability) for the negligent acts, errors, or omissions
of the first party.

The transfer of risk in this fashion may be wholly appropriate under
certain circumstances and completely inappropriate in others, which makes
generalizing a set of rules or parameters for directors to follow nearly

The difficulty arises out of the customized nature of each Hold Harmless
Agreement. The reason one contractual risk transfer clause is acceptable
and another is not is often attributable to the scope of the hold harmless
provision itself. For example, some Hold Harmless Agreements attempt to
make the second party responsible for every eventuality that might cause
injury or damage, including acts of God. You may have seen language in
contracts such as, "You agree to save (the first party) and hold
them harmless from any and all liability, damages, or injuries and defend
them from any and all causes of action arising out of the agreement .
. . ." — or something similar. Contractual wording like this
is clearly not business friendly and should be avoided if at all possible.

Indemnity Agreements or Indemnification Clauses

Whereas, Hold Harmless Agreements involve contractually assuming another
organization's tort liability, Indemnity Agreements or Indemnification
Clauses define a contractual relationship where the second party agrees
to reimburse the first party for damages (including settlements) and/or
expenses (including attorney fees, court, and expert witness fees, etc.),
regardless of which party is at fault. Indemnity Clauses and Hold Harmless
Clauses often go "hand in hand" in contracts.

Exculpatory Clauses or Waivers

Exculpatory (freedom from blame) Clauses or Waivers are different from
Indemnification Clauses. Indemnification Clauses represent promises to
reimburse one party and make them whole, while Exculpatory Clauses involve
one party contractually relinquishing a legal right — for example
giving up the right to sue another party for their negligence. In chapter
sixteen of the book, Legal Liability and Risk Management for Public and
Private Entities, Dr. Betty van der Smissen states, "An Exculpatory
Agreement is a contract which endeavors to alter tort common law, resulting
in a conflict between traditional principles of tort law where the individual
is responsible for one's actions which injure another person and contract
law where parties have the right to define their relationship (van der
Smissen 1990)."

Enlist Your Advisors Immediately

The first step to managing the implications of contractual risk transfer
for your organization — after you have identified the "red
flag" language in a contract — is to enlist your advisors immediately.
Senior management, risk management, insurance, and legal resources should
be contacted and given the opportunity to review the agreement. What should
follow is a "what happens if" discussion designed to uncover
the risks of financial loss to your organization if the agreement is signed
without changes.

Unfortunately, experience demonstrates that many requests for a contractual
review of the "red flag" language take place on second thought
— occurring after the agreement has already been signed. Nothing
can be done under these circumstances. Seek advice early and often. The
expense will be worth it in the long run.

With early involvement, advisors may be able to renegotiate the language
to reduce the risk — or offer other suggestions to transfer or avoid
the risks. If the relationship is mutually desirable, this process should
result in a new awareness, a new section in your risk management plan,
as well as a better contractual relationship with the other organization.

Why Is This Important?

Risks exist in nature, in the facilities, and in the program where people
interact with facilities and nature. These physical risks tend to be the
focus of the camp risk manager. However, business risks exist as well.
Business risks tend to be intangible and not thought about as risks in
the same context as physical risks. This difference may be one reason
why business risks are overlooked. Business risks present every bit as
much potential for financial loss to the organization as more tangible
physical risks. The business risk exists whether identified or not —
and remains whether the director does anything to manage the risk or not.

One of the goals of the camp risk manager is constant improvement. Being
able to recognize contract language as a risk factor — and having
a plan to analyze it and respond to it — is just as important as
having a plan to reduce risk at the waterfront. As insurance costs have
been increasing in recent years, more businesses are employing contractual
risk transfer as a risk management technique. Ignorance of the risk factors
in contracts can lead to unpleasant, potentially expensive, un-insured
surprises — and ultimately threaten the successful completion of
your organization's mission.

The Challenges

Dr. van der Smissen's statement regarding the conflict between tort
and contract law highlights the complexity of contractual risk transfer
as a risk management tool. The complexity is increased by the fact that
the laws of the individual states govern each contract. What works in
one state may not work in another.

Which state has jurisdiction is sometimes also part of the contract.
State laws and the decisions of their courts on the enforceability of
Hold Harmless, Indemnification, and Exculpatory Agreements vary considerably.
That makes it risky to borrow contractual language from other camps not
in your same jurisdiction.

Insurance policies are also contracts. Unfortunately, your particular
camp insurance program may not cover all of the risks and responsibilities
you have assumed by contract. While your camp's general liability insurance
may have a "contractual liability" coverage section, don't assume
the risks your camp has assumed in contracts are completely transferred
through the purchase of insurance. Chances are quite good your insurance
policy will not cover all of the risks assumed in your business agreements.

The Best Strategy

The best approach when it comes to managing the risks in contracts is
to maintain integrity in the risk identification process by reading all
of the contracts your organization signs. To avoid assuming risk blindly,
increase your organization's awareness of the "red flag" language.

Once contractual risk transfer clauses and risks have been identified,
seek the best advice you can afford from management, legal, and insurance
advisors just as soon as you can. If you want to maximize potential for
a successful outcome, try not to bring potentially complex contractual
issues to the attention of advisors at the last minute. Give them some
time to analyze, evaluate, and consider the circumstances. Some research
may be needed to get the best outcome. This strategy may generate some
expenses, but the effort will lead to the establishment of guidelines
for the future. In the end, it will be money well spent.

Before next summer, take some time to increase your knowledge and awareness
about contractual risk transfer issues, implement your own strategy for
managing the risks, and keep up the good work!

Van der Smissen, B. (1990). Legal Liability and
Risk Management for Public and Private Entities. Anderson Publishing

Ed Schirick is president of Schirick and Associates Insurance
Brokers in Rock Hill, New York, where he specializes in providing risk
management advice and in arranging insurance coverage for camps. Schirick
is a chartered property casualty underwriter and a certified insurance
counselor. He can be reached at 845-794-3113.

Originally published in the 2004 January/February
issue of Camping Magazine.