The most common error railroads make when transferring risk of loss to contractors, vendors, etc. in a contract is the use of out-of-date insurance terminology, policies, or policy modifications when drafting contract insurance requirements. Why is this practice so common, and what are the usual results of this practice?

Why so common? First, railroad contracts are usually prepared by railroaders or attorneys who are quite knowledgeable about the contract or the law but do not understand insurance coverage and what can be realistically achieved in the commercial insurance marketplace. Second, they almost always simply copy contract terms that were included in previous agreements without seeking professional risk management assistance. This practice results in the use of insurance terminology, policies, or policy modifications that have been out-of-date for decades, and no longer available in the commercial insurance marketplace.

What are the usual results? One of two things happen: In the first case, all is bliss until some horrific accident requires everyone to pull out the insurance policies only to learn that they do not provide the coverage that was thought to be in place. This results in further complications, including coverage disputes and possible lawsuits with the insurers and between the contracting parties. In the second case, a post contract negotiation process begins as the parties seek to compromise with each other and the insurer on the scope of insurance to be provided. In either case the result is expensive due to legal fees, delays, and unexpected uninsured losses. A party’s performance under a contract can be excused if performance is impossible, see Brown v. Lyons, 2 Ill. App. 2d 228, 119 N.E.2d 452 (App. Ct. 1st Dist. 1954).

Losses will happen, and if you continue to use out-of-date insurance requirements you’ve got to ask yourself one question: “Did he fire 6 shots or only 5 …..Do you feel lucky?”¹ After the negotiations, legal fees, and delays, if you’re lucky, you will recover some of the funds you were relying upon. “Luck is a very thin wire between survival and disaster, and not many people can keep their balance on it.” Hunter S. Thompson.

Or, you can fix your insurance requirements so that they will more effectively fund the indemnity provision of your agreements. How? Get help from CRT Consulting, LLC. Insurance brokers and attorneys are not trained and are not experienced at helping their clients create insurance requirements that will fund the indemnity provisions of their client’s agreements. CRT Consulting, LLC is trained and experienced at doing so, and has a track record that proves it.

¹The Movie Dirty Harry, 1971