PUTTING RISK TRANSFER PROVISIONS IN WRITING

CHICAGO-Although the law has changed over the years, "the old contract doctrine still survives," according to one defense attorney, and with it considerable contractual opportunities to transfer risk.

Properly used, those contractual provisions are effective means of transferring risk, said Patrick W. Brennan, a partner with the Crivello, Carlson, Mentkowski & Steeves S.C. law firm in Milwaukee.

If properly written, courts will uphold those provisions, Mr. Brennan said.

He discussed various aspects of risk transfer devices last month in Chicago at REBEX '97, the annual Risk & Employee Benefits Exposition sponsored by the Chicago, Northeastern Illinois and Wisconsin chapters of the Risk & Insurance Management Society Inc.

Generally, contractual risk transfer provisions can be broken into two groups: protective "risk deflection devices" and risk transfer devices that actually shift the obligation to another party, Mr. Brennan noted.

Risk deflection devices include exculpatory clauses, which essentially bar a party's right to sue for negligent behavior; disclaimers, which in effect say "Don't rely on anything I've said or agreed to do," by putting the other party on notice of limited responsibility; waivers, which are similar to exculpatory clauses and are an explicit agreement in advance not to bring claim or suit; and limitations of liability, which basically say "You can sue me, but only for. . . ," Mr. Brennan said.

Limitation-of-liability provisions essentially restrict the kinds of damages that can be obtained or specify that only certain degrees of negligence will be considered actionable, Mr. Brennan said.

One reason courts allow limitation-of-liability provisions is that the provisions make clear who's responsible for providing insurance.

Indemnity and hold-harmless agreements fall into the risk transferring device group.

"The classical definition of these is that there's a complete shift of liability," Mr. Brennan said. There are, however, hybrid agreements that might provide for only partial transfer of liability, he said.

"The indemnity agreements that I've seen are most dangerous when they come on the back of a document and nobody's seen it," Mr. Brennan said. "They'll still be upheld in many cases."

"Indemnity agreements should be in writing one way or another," Mr. Brennan said. He noted, however, that "negligent vs. intentional behavior can lead to indemnity as well," and indemnity has been allowed in a case involving one co-defendant who was merely negligent vs. the other who was engaged in intentional behavior.

"Don't stop thinking about indemnity when there isn't a contract," Mr. Brennan said.

"Probably the hardest cases that I see are those where you seek indemnity for your own negligence," he said. Indemnity can be obtained in even those cases, however, the attorney said. "Even though it's not favored, it will be upheld if there is sufficient indication that this indeed is the parties' agreement."

In order to trigger indemnity, the best thing a company can do is send the indemnifying party a timely letter that is clear and precise, providing full information about the occurrence, Mr. Brennan said.

The letter should make an unequivocal demand to defend and offer to surrender control of the defense to the indemnifying party.

In making a case for indemnity in court, companies should "be prepared to show that you acted in a way that is consistent with the argument you want to make," Mr. Brennan advised.

In drafting the contract, anyone thinking they might later have to make that risk transfer case in court needs to consider several factors.

One key is whether the contract is contrary to public policy. "If the contract smacks of unfairness, the courts are going to find a way to say public policy prohibits this," Mr. Brennan said.

Of course, if the agreement is against state law, it will not be upheld. And ambiguous contracts will be interpreted against the drafter, Mr. Brennan said.