Risk Management: Limiting Claims

Editor’s note: Last month, this column discussed the importance of having a thorough and signed rental contract. This month, it explores the subject further, including the potential liabilities rental operators face and how contracts can help limit claims.

A woman rented a tiller and while the contract was printing, she went out to help the rental store employee load it into her truck. Climbing into the bed of the truck, intending to secure the tiller, the customer took a step backwards, falling off the tailgate, landing on her knee, breaking her tibia. The injury ultimately required 10 surgeries. Had the contract been signed prior to the accident, the rental store wouldn’t have been held liable for the accident, since the contract included a “hold harmless” clause for “any and all liability arising out of the selection, possession, renting, control, use, operation, handling or transportation of the rented equipment.” Instead, the store’s insurer paid more than $100,000 to settle the claim.

Having a proper contract is just the first step in protecting rental businesses from claims. As this example illustrates, an unsigned contract isn’t worth the paper it’s printed on. Undoubtedly, the employees in this case believed they were acting efficiently, saving time by printing out the contract as the equipment was being loaded. However, the opposite was true — as anyone who has ever faced a liability claim will attest.

Exactly at what point in the rental process should a contract be signed? “The obvious answer is, of course, as soon as possible,” says attorney James Waite. Waite, a partner with Winters & Waite, who has authored the newly updated rental contracts guide, Business Management: Contracts and Legal Guidelines, as well as the previous version published by the American Rental Association (ARA).

The rental counter can get chaotic at times, making it tempting to take shortcuts to get customers out the door quickly, says Waite. He suggests signage stipulating that a customer cannot handle equipment until the contract is signed and that this is a management requirement. Given the potential liabilities, the importance of adhering to this policy cannot be overstated.

“Rental operators face two broad categories of liability — contract liability for failure to comply with the rental contract and tort liability for civil ‘wrongs’ such as negligence,” Waite explains. “Beneath these general headings exist a number of potential subcategories of claims for things like ‘strict product liability,’ ‘breach of duty,’ ‘breach of warranty,’ ‘misrepresentation’ and others.”

Insurance will cover some of these claims; for others, coverage isn’t available. Where coverage doesn’t exist, the losses to rental operators can be “considerable,” Waite says.

However, he says a properly drafted contract can limit or eliminate many of these claims in a variety of ways, for example, by:

  1. Having the customer waive them in writing.
  2. Obtaining the customer’s agreement to an absolute upper limit/ceiling on the rental company’s potential liability.
  3. Obtaining the customer’s agreement to “indemnify, defend and hold harmless” the rental company.
  4. Shifting the legal burden(s) associated with such claims to other parties, such as event operators, manufacturers, contractors or third-party insurers.

Waite cautions that, depending on the area, juries and judges may favor some contractual protections over others. Therefore, including as many different types of protections as possible in the contract is generally the optimal approach.

As for whether or not signing a new contract is required should the rental order change, Waite says it depends upon the language included in the contract.

“For example, a rental contract might include language indicating that it applies to all equipment provided by the rental company, even equipment provided after the customer has signed the rental contract, unless otherwise agreed by the rental operator,” he says.

Circumstances also factor in. For example, if the order is reduced and the rental operator doesn’t intend to charge a cancellation fee, signing a new contract might be the best option. Or, the operator may opt to retain the original contract in order to document the cancellation and keep the deposit.

Because laws can change quickly, Waite says contracts should undergo a review by a rental industry attorney at least once every two years. The cost, which should be less than $1,000, could save rental operators significantly more than that, he says.

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