What is Contractual Liability?
Many of our clients are regularly asked to sign contracts with indemnities, warranties and other problem clauses. How much do you know about increasing your exposure by contractual liability and the IMPACT it can have on your insurance policies and even your assets?
Do your contracts administration team know what to look for? Are they familiar with the insurance and indemnification clauses?
It isn’t uncommon for contract terms and conditions to be in favour of the principal, this is simply a form of risk mitigation. The issue often lies with contracts that are not fair and reasonable, contracts where you are being asked to accept someone else’s responsibilities, some of which may be outside of your control.
It is important for clients to also obtain legal advice as sometimes by not accepting these terms you are then at risk of breaching the contract terms and conditions.
What is Contractual Liability? - Understanding Contractual Liability and Insurance Clauses
Contractual Liability is defined as:
“Any liability assumed under a contract that requires You to effect insurance over property or to be liable for Personal Injury or Property Damage regardless of fault, except where:
a. That liability would otherwise exist at law in the absence of the contract; or
b. The contract is an Incidental Contract and the liability does not arise by reason of an obligation to insure a leased property or an obligation to indemnify a landlord irrespective of fault.”
It is common for commercial contracts to be used by the parties to allocate and transfer risk.
Such contracts frequently include mechanisms of allocating or altering risk, by which one party (e.g. principal) seeks to transfer all or part of their liability to another party (e.g. contractor).
The most common types of clauses include:
a. Clauses which impose a higher standard of care or a more onerous measure of damage
b. Indemnity clauses which require one party to pay the liabilities, costs, expenses and loss of the other party arising from the performance of the contract
c. Releases by which one party agrees to release the other party (invariably the principal) from liability.
It is also common for commercial contracts to contain insurance clauses which require one party to arrange a specified type and level of insurance in respect of obligations connected with the contract. Often such clauses will require that the cover extends to certain obligations of the principal, head contractors, subcontractors and others.
Most General Liability policies are not designed to cover the risks and exposures of others, only the risks associated with the named insured who is entering into the contract of insurance, specific to their business operations and the terms and conditions of the insurance policy.
What is Contractual Liability Insurance?
Contractual Liability Insurance is an insurance policy or an insurance coverage that can be placed to assist with mitigating some (not all) contractual liability exposures. Contractual Liability Insurance has and is still hard to obtain, especially on a blanket cover basis. There are some insurers in the market place that offer a contractual liability policy, which assists with bridging some gaps identified in contractual exposures. Whilst this is very beneficial for some clients and their contractors, there are still risks that cannot be protected. One insurer in the market offers an annual contractual liability policy to the construction industry, however it still does not cover some key exposures, such as:
a. Failures to arrange or maintain the insurance required under the contract or by law;
b. Damage to property under construction unless the insured also holds also a contract works policy
c. Punitive, exemplary and aggravated damages, liquidated damages or fines and penalties or deductible amounts payable under the principal’s program
d. Releases from liability or costs that would have been recoverable at law unless the release, waiver or limitation is required by contract.
Certain insurance companies will also review a copy of the contract and may agree to note the principal contractor as a named insured.
As our environment becomes more litigious, it is more common for insurers to only accept a principal contractor as being noted as an interested party for their respected rights and interested only.
Unfair Contract Terms:
It isn’t uncommon for our clients to say “but if we don’t accept their terms, they will award the contract to someone who will”.
Unfortunately in most cases, this is the case and our clients are forced to:
a. Put their business and insurances at risk
b. Lose an opportunity
In some cases, our clients MAY be protected by Unfair Contract Terms Legislation.
Unfair contract terms legislation may be available to provide relief to parties from the operation of unfair contract terms contained in contracts for the supply of goods or services where:
a. The contract is a ‘Standard Form’ contract (being a contract which is drafted by the other party; not subject to negotiations between the parties, and where the party which did not prepare the contract has no real bargaining power);
b. The contract is entered into by a small business (who employs less than 20 people); and
c. The ‘upfront price’ of the contract does not exceed $300,000 per annum, or does not exceed $1 million if the contract runs for longer than 1 year.
There are various other factors that may complicate the matter and we recommend seeking advice from a solicitor to discuss this further. Unfair Contract Terms should be a last resort as this can be quite a lengthy and complicated process.
Remember, don’t sign ANY CONTRACTS without checking with us first to determine if your insurance program should cover the additional liabilities that you are likely to assume by signing - or if you are able to obtain additional cover in the market for these liabilities. As your insurance broker, we are able to advise on the insurance coverage that you have. We can also arrange for a specialist third party to complete any necessary legal reviews (insurance clauses) — which are outside our area of expertise. You should be aware that in some cases it is not commercially possible to obtain insurance cover for some of the more onerous clauses that can often be included in contracts. Be aware BEFORE you sign.
Services available through Hunter Broking Group include:
a. Insurance advice - we can provide qualified insurance advice to assist with contracts
b. Contractual liability tip sheets- handy tips - free
c. Contractual liability experts -we have access to a free helpline to help us analyse your insurance/contract issues
d. Contract review service -detailed legal review / renegotiation of the insurance clauses in your contracts available - on a fee for service basis.
This article originally appeared on Hunter Broking Group Website and has been published here with permission.
Advisr does not provide advice and does not hold a financial service license (AFSL). All information above has been provided by Josh Ryan.