Be Careful about Contractual Duties to Provide Insurance

Missouri Contract Cases
contract insurance requirements

When someone takes on a contractual obligation to provide insurance, that duty can preclude them from looking to the other party for damages covered by the required insurance.

In Storey v. RGIS Inventory Specialists, Kenneth Storey leased property to RGIS. The property was destroyed by a fire allegedly caused by one of RGIS’s employees. The lease required RGIS to repair damages to the leased premises caused by the negligence or intentional acts or omissions of RGIS, its agents, servants, or employees. Storey sued RGIS for damages resulting from the fire. The court dismissed Storey’s case on a summary judgment motion.

Why wasn’t Storey able to recover from RGIS? Because provisions in the lease agreement–including Storey’s obligation to provide insurance–showed that the parties intended to exempt RGIS from liability for loss from fire. The lease required Storey to procure insurance for the benefit of both parties in an amount equal to the replacement costs of the leased premises. In addition, the lease required RGIS to surrender the premises in good order “ … damage by fire … excepted,” which evidenced the parties’ intent to exempt RGIS from liability from loss from fire.

Reading the lease as a whole, it seems clear that the parties intended to look solely to the required insurance for losses caused by fire. However, even the bare requirement to provide insurance could be enough for a court to come to that conclusion. The Storey court quoted an earlier Missouri case, Nodaway Valley Bank v. E.L. Crawford Const., which states that “where parties to a business transaction mutually agree that insurance will be provided as a part of the bargain, such agreement must be construed as providing mutual exculpation to the bargaining parties who must be deemed to have agreed to look solely to the insurance in the event of loss and not to liability on the party of the opposing party,” 126 S.W.3d 820, 828 (Mo. Ct. App. 2004). This could be quite a surprise to someone who, not knowing the law, agrees to a duty to provide insurance but thinks they would be able to seek damages.

So what should contract drafters do?

First, think through the role you intend insurance to play. Do you intend that it will merely be a backstop to ensure that the parties have the means to pay for their contract obligations? Or do you intend for the parties to be able to look solely to the required insurance and not to each other?

Second, be clear about your intention. If you intend that insurance will be used merely to make sure the parties have the means to pay for their contract obligations, you provide clarity by stating in the agreement that a party’s obligation to provide insurance does not exempt the parties from their other obligations under the contract. If you intend for the parties to be able to look solely to the required insurance, clearly state that intention.

Such clarity could keep you out of court because it decreases the risk that you’ll need a judge to interpret the parties’ obligations (read: cha ching!). Also, people reading the contract–especially the contracting parties themselves–will know their rights and obligations merely by reading the contract.

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