Contracts are a part of every business. Millions of contractual agreements are signed every day and many, probably the majority, are not reviewed. This is fine if nothing goes wrong. You can sign the worst contract in the world, and if there is no problem, there will be no problem. If however there is a problem, the first thing that will be looked at is the contract.

As Risk Advisors we review contracts for our clients on a regular basis. We provide a risk management and insurance review, not a legal review. Large complex construction contracts or agreements for professional services usually require both risk management and legal analysis. Premises leases are detailed and need a comprehensive review as well. What is often overlooked however are those more common and seemingly mundane agreements.

One of our clients operated a clean room as part of their manufacturing operations. “Clean Rooms” need to be clean and they contracted with a janitorial company to do just that (the contract however was not reviewed). They payed about $2,500 a month or $30,000 a year for the service.

The clean room had cameras so the company could track who was coming and going and who was doing what. The janitorial company, fully garbed in a haz-mat suit, was doing what they do. Cleaning the floors, the walls and even the ceilings. To clean the ceilings they used a “swiffer” type product. As the employee was “swiffering” the ceiling, they knocked off a sprinkler head… remember this was being filmed and you could read the lips of the employee (humorous for those watching the video, but not for the chagrined worker), water went everywhere… this was a problem.

Turns out it cost over $800,000 to get rid of the water and repair the damage. No problem right, the Janitorial Company had insurance to pay for the damage. What our client didn’t realize however is that their contract with the Janitorial Company had a provision called a Limitation of Liability clause. It basically read that the customer, our client, agreed to limit the Janitorial Company’s liability to the amount of their annual fee… $30,000! The balance of the claim was fortunately covered by our client’s property insurance, but this went on their loss record. Their insurance company wasn’t thrilled paying such a sizable loss for something that could have been avoided and they offered renewal terms with a large increase in premium.

The lesson here is all contracts need to be reviewed. Ideally each party is responsible for their own mistakes. Indemnity agreements, waivers and limitation of liability provisions need to be understood and when appropriate modified.