Contract review considerations
for insurance purposes
Contract review considerations
The easiest way to put yourself out of business is to agree to a contract that exposes you to uninsured risks that are not covered by your Insurance.
Disclaimers
- The purpose of this document is not to provide legal advice and is not intended to act as a full commercial contract review.
- The recommendations / considerations within this document are general in nature and provided in the capacity as your insurance broker. They should not be construed as legal advice. Separate legal advice relating to the interpretation and implication of any clause should be obtained.
Summary
- Check the scope of services
It is important that you detail the scope of services to clients accurately. Check that the services you have agreed to within the contract match your business description within the insurance coverage and ensure the proposed activities are not excluded. If any services you have agreed to are excluded, you may need to re-consider performing those activities for the client. If you need to expand your Business description / occupation within your Insurance policy, contact your broker and request an amendment to your insurance, and ensure you have received acceptance of any requested changes.
- Review the nature of the Contract
You may be wondering what standard you are expected to perform your services? You have a duty of care to perform the Services to the standard of care and skill to be expected of your occupation.You must use the degree of skill and care expected of a reasonably competent professional who regularly acts in the capacity in which the Consultant is engaged and who possesses the knowledge and experience of a professional qualified to act in that capacity.
Some contracts drafted by a party often contain clauses which risk infringing the assumed liability exclusion.Among other things, the following key clauses should be considered as they may be drafted in a way as to impact your coverage availability or infringe the assumed liability exclusion (these topics are discussed in more detail below):
Indemnities – Carefully read the Indemnity clause
A promise to “indemnify” someone is a promise to pay compensation to them. Any additional liability imposed by an indemnity may not be covered because indemnities usually require payment of a higher level of compensation than the law would normally require. This risks infringing the Assumed Liability exclusion in your policy.
Key Considerations:
- Best solution may be to delete the indemnity. However, this is often not possible. As a result, it is worth considering the wording of the clause. Indemnities are lower risk if:
– They require you to indemnify only when you have breached an existing legal duty
– reflect proportionate liability and contributory negligence
– require the indemnified party to take reasonable steps to mitigate its loss
- Indemnities about specific matters that are within your control might be considered lower risk but broad general indemnities about the whole of your services are generally higher risk
- Some insurers will provide optional extension for indemnities. Does your policy contain a Contractual Liability Optional Extension which provides cover for indemnities.
- If you are not able to negotiate deletion of the indemnity clause, please see the following Australian Standard Indemnity clause which you may wish to utilise:
The Consultant indemnifies the Principal against liability or loss in respect of injury (including death) to any person or damage to any property arising out of the Services under this Agreement to the extent that the same is due to the negligence of the Consultant or its employees, sub-consultants or agents for whose acts errors or omissions the Principal is legally liable and to the extent that the Consultant’s liability for each or any of the above is established in a court of appropriate jurisdiction or by agreement by the parties. The Consultant’s liability to indemnify the Principal shall be reduced proportionally to the extent that the acts or omissions of the Principal’s employees, sub-consultants or agents contributed to such a claim, liability or loss and/or where the Principal has failed to mitigate such liability or loss.
Warranties
Warranties are often specifically listed in the assumed liability exclusion in insurance policies as a type of obligation which the insurer does not intend to cover.
Key Considerations:
- Warranties which are narrow and apply to specifics may be lower risk than warranties which relate to provision of services (quality, cost etc)
- Replace “warrants” with “acknowledges and agrees”
Standard of care
The typical standard of competence is an ordinary skilled practitioner in the same field. There is no requirement that you possess “expert” skill or perform your services to the “highest” or “best” standard. Contractually agreeing to provide services at a higher standard could result in additional liability being imposed which may infringe the Assumed Liability exclusion.
Key considerations:
- Delete the adjectives such as “best”, “expert”, “highest” or “high”
- If standard is referred to when describing services, you may consider including “reasonable standard”.
Ensure clauses
- Clauses requiring consultants to “ensure” an outcome are demanding a higher standard of performance, often amounting to a guarantee.
- Agreeing to perform to this higher standard is likely to infringe the assumed liability exclusion.
- Professional indemnity insurance policy will generally cover the consultant’s usual legal duty, but may not cover the additional risk resulting from the “ensure” obligation.
- If you have control over matter- less risky. If required to ensure something depending on factors outside control – higher risk
Key consideration:
- Recommend replacing “ensure” clauses with those requiring consultant to “take reasonable steps”.
Proportionate liability
Proportionate liability clauses may be present in a contract and generally indicate a party’s liability for damages to be limited to that portion of the damages for which it is responsible. Without this protection, your company may be liable for full damages (joint and several principle) even if other parties contributed to the loss or damage and should be contributing to the loss suffered.
Key considerations:
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- We recommend deletion of hold harmless clauses.
- If it is not possible to remove this clause, check with your broker if your insurer can provide an optional extension to contract out of proportionate liability
Liquidated damages
Liquidated damages are predetermined damages. Liquidated damages risk infringing Assumed Liability exclusion if the liquidated damages are greater than client would have been entitled to
Key considerations:
- Recommend that insureds delete liquidated damages clauses
Waiver of Rights and Releases
Contractual obligations which release the client from future claims are likely to infringe the waiver of rights exclusion
Key considerations
- Do not agree to clauses which prejudice insurer’s right of subrogation
- Delete clauses releasing client from future claims
- Or add “for professional fees and similar expenses” so the release is narrow
Limitation of Liability – Is the party attempting to cap their liability?
This may expose you to liability for the whole loss suffered by a third party, in circumstances where such liability would have otherwise been partly or fully recoverable from your client. This will amount to a waiver of rights and lead to uninsured loss.
Where you allow your client to place a “cap” on their liability, this may prevent your insurer from pursuing a subrogated claim for damages against your client. This is likely to enliven the waiver of rights exclusion and could result in liability which is excluded from cover to the extent of the prejudice suffered by your insurer.
Key considerations:
- Avoid allowing client to limit or exclude liability. This could result in a waiver of rights if liability would have been partially or fully recoverable by the insurer
- Similarly a cap on liability could prejudice insurer’s right of subrogation
Obligation to maintain insurance
Some contracts may stipulate a duration and/or other terms to which the insurance must be held. Professional Indemnity and Public Liability insurance are annual and must be renewed each year. You can not be certain of obtaining cover on the exact same terms or at all.
Key considerations:
- Consider incorporating the following in relation to maintaining insurance “Subject to continuing availability upon reasonable commercial terms …”.
Policy subject to Approval / Keep Client informed on Claims
If a policy generally covers all projects, it may not be reasonable to change insurers or policy terms to suit the preferences of one client.
Key considerations:
- Consider deletion of clauses which give a client any right of approval over Professional Indemnity insurance
- We suggest that you do not agree to keep the client informed of developments regarding claims notified
- If client insists, at least include that you are not obliged to provide information where it may prejudice the defence of the claim
Client wants to be listed as a co-insured or other named insured
The request to be a co-insured or named insured is not reasonable and will not usually be granted by Insurers as it would give the requesting party unlimited access to your policy to utilise as if it is their own and provides them with the opportunity to make changes and claim against the policy. If a Principal is asking to be named as an insured, their interests may conflict against your own. It can also impinge on clauses within the policy, such as the insured vs insured exclusion and subrogation clauses.
Key considerations
- Remove any reference to the Principal as a co-insured or other named insured.
Commercial considerations if client won’t amend contract
- Consider using your own terms & conditions or industry standard contracts where possible to assist you.
- The purpose of this advice is to assist you in identifying potential uninsured risks. Ultimately, you may need to make a commercial decision as to whether you accept the risk if there is a possibility for or exposure to, uninsured risk.
- You need to consider the amount of risk you are willing to carry yourself and weigh up the worst case scenario of agreement to certain clauses, but firstly try to protect your insurance policy where you can – you may need it!
- If one or any of the above issues are evident in your contract, this does not mean your insurance is void. The worst case may be that you are wholly or partially uninsured.
For further information regarding the insurance implications to contractual clauses please contact Austbrokers Countrywide on 03 9835 1300.
For a full contract review, we recommend Barry Nilsson Lawyers.
