Insurance Clauses in Contracts David Kent Snr Consultant Marsh Risk Consulting
Indemnity and Insurance clauses Examples:- • Construction contracts • Strategic alliances • Warehousing contracts • Distribution contracts • IT services • Leases and rental agreements • Maintenance contracts • Sale or purchase documents
What things need to be considered before entering into a contract? For example: • What are the risks? • What are insurable risks? • Is insurance required? • Which policy type and what amount is appropriate?
Contract - Indemnity Clause • An Indemnity Clause is quite separate from an Insurance Clause. • The Indemnity Clause is a contractual risk transfer in the form of an agreement between the Indemnitee (usually the principal) and the Indemnitor (usually the Contractor, licence holder, lease holder etc). • It details the extent of liability securing the Indemnitee against loss or damage.
EXAMPLE - INDEMNITY CLAUSE • Tasty Treats Pty Ltd agrees to indemnify the State of Tasmania, which term includes the Secretary of the Department of X X X, its servants and agents in respect of any claim or liability for damages AND releases and discharges the State of Tasmania and its servants and agents from any loss or liability for property damage and/or injury which arises directly or indirectly out of the acts or omissions of Tasty Treats Pty Ltd or its servants or agents (but therefore NOT the acts or omissions of the State of Tasmania, its servants or agents) consequential upon the use or occupation of the land and/or premises on 21 SEPTEMBER 2005 ……... Example clause only. Incomplete and not to be relied upon.
Contract - Insurance Clause • A contract wording usually carries Insurance Clauses which set out the minimum level of coverage required to be effected by the Indemnitor and special provisions that are to apply to each coverage. • Examples of some insurance covers: • Public and Products Liability Insurance • Professional Indemnity • Property Insurance • Workers Compensation • Compulsory Third Party (motor) • Third Party Property Damage (motor)
EXAMPLE - INSURANCE CLAUSE • Tasty Treats Pty Ltd agrees to maintain a public and product liability insurance policy which names the State of Tasmania (which term includes the Secretary of the Department of X X X, its servants and agents) as an insured in respect of personal injury and/or property damage arising directly or indirectly out of the acts or omissions of Tasty Treats Pty Ltd. • SPECIFIED INSURANCE • $10M for any one occurrence during the policy period. • quiz Example clauses only. Incomplete and not to be relied upon.
Understanding Insurance Covers David F. Kent Client Service Executive
Industrial Special Risks (Property) • Covers the Insured for: • physical loss destruction or damage to the insured property • in some cases the costs incurred due to the interruption of your business activities arising from the loss of or damage to the insured property • Some examples are: • Fire • Storm • Vandalism • Theft / Loss • Water Leakage • Accidental Damage
Public & Products Liability Insurance • A Liability Insurance policy will cover the Insured Organisation for LEGALLIABILITY caused in the conduct of the business or operations arising out of • Injury to Persons or • Damage to Property (of 3rd parties) • Typically an “occurrence wording”, e.g. • if a writ is received in 2005 regarding an incident (event) that caused an injury to a member of the public in 1999, then the public liability policy which was in effect at the time of the loss in 1999 would respond to the claim.
Examples • A member of the public slips on a spillage at the premises • A child is injured in a fall from playground equipment which was allegedly inadequately supervised • Member of the public is injured due to collapse of playground equipment • A salmonella-contaminated ham sandwich purchased from your canteen by a visitor causes food poisoning
Professional Indemnity • Professional Indemnity Policy covers legal liability arising out of a breach of duty owed in a professional capacity. • Claims commonly arise where a third party: • Relies on allegedly negligently given professional advice or service, and • In relying on that advice or service sustains a loss
Professional Indemnity • Joint Insured? • Typically NOT possible to extend cover as Joint Insureds. A stand-alone Project Specific PI policy, naming all insured parties, is possible • Unless “held harmless” the Client retains the indirect benefit of being able to recover for damages to the extent that they are caused by the contractor who in turn may recover from his PI insurer.
Professional Indemnity • Typically a "claims made wording”, e.g. • if a writ is received in 2005 regarding a financial loss (event) arising from an inappropriate design in 1999, then (assuming that there were no prior indications of the claim) it is the 2005 policy which would respond. • Specified as being required by the contractor for a period of no less than 6 years after the completion of the project/contract.
Motor Vehicle Compulsory Third Party (CTP) • Coverage for injury to 3rd parties • Evidence of the Contractor’s vehicles being covered by CTP insurance is often overlooked. • Vehicles operate in another State, additional evidence is required. Third Party Property Damage (TPPD) • Coverage for damage to 3rd party owed property
Liability Wordings Claims Made – vs Occurrence • Occurrence Insurer is on risk both during the policy year and into the future for claims arising from incidents/losses arising from a particular policy year, ie, No sunset – insurer can never confidentially close his book on that year – eg, old asbestos in USA and Australia. • Claims Made Insurer is on risk only during the stated policy period for: - Claims arising during the policy year, and - Claims first made against the insured (and notified to the insurer) during the policy year arising from events/losses in prior years. Thus insurer is providing current cover and limited retrospective cover only and can close his book at the end of the policy year.
Liability Wordings (cont.) Claims Made: Implications for the Insured 1. If insured: • Receives a claim, or becomes aware of an event that may give rise to a future claim during the policy year and does not notify the insurer within the policy year. = No Cover 2. Insurer has the ability to limit the scope of the retroactive cover it offers based upon its knowledge of the insured’s past operations.
Indemnity Clause - Consequential Loss • Typical contract negotiations involve refusal to accept liability for “consequential loss”. Many hours can be spent arguing over the exclusion or limits for consequential loss . • To be effective, there should be a clear definition of what “consequential loss” or “indirect or pure financial loss” means. • Perre v Apand Pty Ltd (1999) Potato growers were forced to sell potatoes at cheaper prices as they were prevented from selling their produce to more lucrative markets because of quarantine restrictions applied following bacteria wilt damage to potatoes at a neighbouring property. It was decided that this was indirect or pure financial loss and was not recoverable under a public and products liability policy
Consequential loss cont. • Public Liability insurance already provides coverage for direct consequentialloss. • All liability policy wordings exclude coverage for “indirect or pure financial loss” • “Consequential Loss” is economic loss that is a direct consequence of and is linked directly to injury or damage to the property of the claimant . • “Indirect or Pure Financial Loss” is financial loss that does not result from injury or damage to the property of the claimant but of some other party. • Which policies: Public Liability, 3rd party liability coverage of Motor Vehicle, and P&I coverage of Marine policies
Insurance Certificates and Documentation David F. Kent Client Service Executive
Disclaimer This communication is intended to provide general information on either indemnity or insurance provisions of contract(s) or both in summary form from an insurance perspective. The contents do not in any way constitute legal advice and should not be relied upon as such. Marsh recommends you seek formal legal advice in connection with this matter.
Risk Management Hierarchy of Insurance • Optimum (requires consideration of policy structure) • Named as a co-insured/additional insured • Limited Alternative • Named as a principal • Minimum • Provision of proof of coverage NOTE: In all cases proof of coverage must be sought, reviewed, recorded and retained.
Hierarchy of Insurance Conditions Insurable Risk Additional Insured Principal Interest Noted Uninsurable risk (speculative and non-speculative))
Named as a co-insured (additional insured) • Difficult to obtain as it entitles the co-insured to all rights of coverage and obligations as an insured • Effective need for Waiver of Subrogation Clause, Cross Liability Clause, Breach of Conditions Clause (alternatively a “Severability Clause / Non-Vitiation Clause”) and Primary Cover Clause. Consideration of a “Security of Insurer Clause”. • Unless qualified, the named party becomes an insured under the policy to the full extent of their operations/products. Including the need to comply with the terms and conditions of the policy such as:- (a) reasonable care (b) notification of claims (c) changes in risk (d) duty of disclosure (e) payment of premium
Named as a principal • Broadform Liability wordings may include in a Definition of Insured along the lines of :- “ any principal in respect of the liability of such principal arising out of the performance by the Insured or by any party designated in paragraph (b) above, of any contract or agreement for the performance of work for such principal, but only to the extent required by such contract or agreement “ • the Principal becomes a third party beneficiary but only to the extent that the direct Insured causes the Principal to incur a legal liability in respect of work performed by the direct Insured • NO INDEMNITY is provided to the Principal for their own liability which may arise because of the actions of the Principal.
Noting a Party's interest • Annual sighting of proof of coverage • Noting of a party's interest under the policy by endorsement without qualification as to what that interest or reference to any a contract condition leaves the extent of indemnity unclear • Legal implications of “noting” is uncertain • The notation can be argued satisfy the disclosure obligation when dealing with an underwriter.
Key Points • Contract conditions • documentation names the contracted party • type(s) of cover required • limit of indemnity • special conditions eg. co insured, interests noted • Authorised insurers - www.apra.gov.au • if not APRA listed then refer to in house insurance advisor, legal advisor, Crown Law, TRMF Fund Administration Agent (Marsh) for further consideration and advice. • Not being listed on the APRA website should “raise a flag” but is NOT a “deal breaker”
GUIDELINES FOR DETERMININGAPPROPRIATELEVELS OF INSURANCE FOR GOODS AND SERVICES CONTRACTS