By Robert Stoneham
Many contractors will be familiar with the various forms of contract used in today's business environment. It is important that business owners understand the ramifications of contractual obligations/ conditions with regard to insurance coverage and how insurance coverage may be prejudiced in the event of a claim which includes contractual liability issues.
In most of these contracts, the insurance/indemnity clauses will state words to the effect: "ABC Pty Ltd agrees to indemnify XYZ Pty Ltd &38230; " (XYZ Pty Ltd being a principal in contract.)
There are numerous versions of these indemnity/hold harmless/assumed liability clauses contained in contracts; however, the net result is that ABC Pty Ltd has agreed (under contract) to indemnify XYZ Pty Ltd, in some instances, for 'anything that may happen' whether ABC is negligent or not.
Indemnity is defined as security or protection against loss or injury or a promise by a promisor to keep the promisee harmless against loss as a result of entering into a transaction with a third party.
Most liability insurance contracts (public/product liability, broadform liability insurance, professional indemnity, etc) contain exclusion clauses that relate to contractual liability assumed by contracting parties.
Common contracts encountered by business will include (but not be limited to):
Insurance companies are hesitant in providing blanket contractual liability cover under liability insurance programs because, more often than not, these indemnity clauses contain provisions that are in excess of what common law would normally require. If you agree to these types of clauses, you could be providing something well above what the law would normally require of you and you have effectively discarded any legal rights that you may have had.
It is very important that the insured parties obtain legal advice from their respective counsel with regard to contract conditions prior to the signing of those contracts.
Furthermore, all contracts that you enter into should be referred to your insurance broker or insurer for vetting, again prior to their execution.
Insurers will not provide you with any legal opinion or advice; however, depending on the contract and what it actually involves, some insurers may agree to provide the contractual liability cover. Insurers may charge extra premium for this additional risk.
Another potential contractual liability issue that you need to be aware of is 'waiver of subrogation rights'. Insurers rarely grant this; however, we have seen instances where companies have signed contracts containing this clause (plus the indemnity clause) and have not had the contract vetted by their insurance broker.
Apart from the fact that this creates breach of contract conditions, it potentially leaves the insured uninsured! Insurers rarely agree to waiver their rights of subrogation against potential negligent third parties. If you have agreed to these onerous conditions, you have essentially prejudiced your insurer's rights of recovery. Check your policy wording in the exclusions section for contractual liability.
With WorkCover launching recovering actions against negligent employers, you have to wonder who is going to pay the legal bill if you are being sued. Please consider the following scenario:
Liability insurance programs require a 'trigger' that leads to legal liability on the insured's part causing personal injury or property damage. If you aren't legally liable, then your insurers may not have to indemnify you against substantial legal costs, damages awards or court-imposed penalties.
You need to obtain legal advice with all contractual matters, together with referring contract insurance and indemnity clauses to your insurance providers. If you are not being briefed on these areas, then you have to consider the effectiveness of your risk management program.
I C Frith and Associates specialize in reviewing contracts relative to liability insurance and are the endorsed broker to the national Electrical Communications Association in relation to providing combined professional indemnity and general liability to its members.
