Some Advice on Structured Policies

I practiced corporate law for 15 years. I spent most of that time drafting, negotiating and closing multi-million dollar real estate and equipment leases, which were intended to last for at least 25 years. After practicing in this field for about five years I noticed that most of my fellow lawyers relied on standardized, lengthy boilerplate. For example, most leases contain a section that holds the Lessor harmless from liability. Many lawyers preferred to draft these limited liability clauses by exhaustively listing every possible situation where an expense or loss might occur and in each one making it clear that the Lessor was not responsible. Some of these sections would span two full pages in the contract.

What I found interesting was that, because these leases spanned many years and often the original parties to the transaction quickly moved on, major disagreements would arise over the limited liability section. The section might contain a list of the various types of taxes (including interest and penalties) that the Lessor would not be responsible for paying. Then five years after the lease was signed, a municipality would initiate a unique form of taxation that was not specifically described in the section and the Lessor and Lessee would rally their lawyers to debate which party was liable.

I realized that the challenge was not just to draft language that the original parties to the lease would agree to. It was also to draft language that still revealed the original intent of the parties, even when read by people unfamiliar with the negotiations long after the original signors had moved on to other jobs. My solution was to focus on language that was short, clear and simple, language that clearly described the original intention of the parties, language that withstood the test of time. My limited liability sections typically consisted of one short paragraph that simply stated that the Lessor was not liable for anything, even gross negligence. Most Lessees would balk at agreeing to the section, because, without the confusing boilerplate, they could see that they would have to bear the burden for almost any loss. Even though this made the negotiations more difficult, I preferred this approach. If the lease closed, it was because the parties understood their respective responsibilities and there was a high probability that future parties would also understand their responsibilities.

This experience has left me with a strong aversion for highly structured policies. I have read far too many policies where I have had to wade through four or five pages of boilerplate before I even got to the actual policy provisions. I find myself wondering what value this language provides. If the policy has to spell out in great detail which businesses are within the scope or which individuals are responsible for enforcing the policy, it implies that there is not a clear understanding or acceptance of the policy provisions across the corporation. I also wonder if the people in the far-flung offices of the corporation who actually have to implement the policy could actually have the patience to read all the boilerplate, much less understand it. In effect, the highly structured policy is less likely to survive the test of time than the short and simple policy.

So, if you can, keep it simple.

©2009 ISRMC, LLC