Business Contracts and your insurances
Many agreements signed by businesses on a day to day basis may look harmless enough, but can often contain provisions which can impact the effectiveness of your insurances as a tool for protecting your business against risk.
Many insurers will provide insurance coverage on the basis/assumption that an insured:
a) will not act to limit the insurer’s rights of subrogation; and
b) will not act to affect the scope of the insured’s liability (i.e. the insured will not contract to broaden the scope of its liability beyond what it would be liable for at Common Law).
An insurer’s right of subrogation is its right to bring a claim on behalf of an insured party against other parties who have some responsibility for insurable loss or damage suffered by an insured party. This right is akin to standing in the shoes of the insured party and is partly the reason why insurers structure their policies the way they do.
What to look out for?
Below are some brief examples of the types of conflicts which can occur between insurance policy wording and the content of commercial contracts.
Indemnities: or “hold harmless” clauses are aimed at shifting liability from one contracting party to another. Many insurance policies contain “contractual liability” exemptions which state that the insurance will not act to cover an insured for liability arising out of an indemnity or hold harmless clause where such liability would not ordinarily lie with the insured party if the contract did not exist at all
Named Insured: Some insurance clauses call for one contracting party to name another as an insured under one or more of its own insurance policies for their respective rights and interests against liability to third parties for loss of or damage etc. Unfortunately the clause often leaves the extent of the cover required very broad or open-ended which can then be at odds with the wording of your own policy.
Policy Limits: Commercial contracts will often call for a supplier to take out insurances (such as public liability or professional indemnity) with certain limits of liability. These need to match up with your insurances. Not just the aggregate claim amount but also the number of claims allowed under the policy. EG “$20m per claim and in the aggregate” is a very different limit to “$20m per claim, unlimited claims”.
Waiver of Subrogation: Calling for an insurer to waive its rights to step into the position of the insured for the purposes of making or defending any claims the insured might have. This effectively limits the rights of the insurer and may well be a breach of an insurance policy.
What to do?
Generally speaking, either the commercial contract needs to be negotiated to ensure it aligns with your insurance policy wording, you need to seek specific exceptions or extensions to your insurance policy, or you need to do a mixture of both of these things.
If you require advice on the content and effect of your insurance policies or you require assistance in reviewing and negotiating commercial contracts, please contact Tim Osborn for assistance on 02 4925 2077.