Insuring Your Contractual Liabilities

December 2012

Professional Indemnity insurance covering liabilities assumed under contract is now available. 

Most professional indemnity policies contain outright exclusions in relation to liabilities assumed by the insured under contract unless those liabilities would have existed in the absence of the contract. The intention of such clauses is to limit cover to the Insured’s common law and statutory liabilities arising out of their professional activities. This means that in the event that a claim is based upon liabilities assumed under contract the insurer will limit cover to liability to arising under common law or statute and the Insured will be exposed for any additional amount. In such circumstances it is a commercial decision for consultants whether to assume such onerous (potentially uninsured) contractual obligations. 

Risk allocation between the consultant and other parties is a typical feature of consultancy agreements with client drafted agreements often imposing onerous obligations upon the consultant that extend the consultants liability beyond that which would otherwise exist, and therefore beyond the scope of their insurance program. Two common mechanisms for extending a consultant’s liability under contract are through the use of indemnities and “contracting out” which is the circumvention of proportionate liability legislation: 

Indemnities are a promise to indemnify or hold harmless another party. Client drafted contracts often contain indemnity clauses that extend the consultants obligations beyond that which would have existing in the absence of the agreement; 

Proportionate Liability legislation was introduced to replace the common law doctrine of joint and several liability under which a party could be found 100% liable for loss or damage that they were only 1% responsible for. Under proportionate liability the liability of each wrongdoer is limited to the extent to which he or she is directly responsible for the loss or damage. Some proportionate liability legislation contains provisions that prevent “contracting out” however some jurisdictions are silent on the matter or explicitly permit parties to “contract out”. 

Client drafted contracts often require the consultant to “contract out” of proportionate liability or if this is not allowed require the consultant to indemnify the client to the extent that they are prejudiced by the parties not being able to contract out. 

Traditionally cover for liabilities assumed under contract through indemnities or contracting out has not been available under professional indemnity policies. 

Specialist professional indemnity insurer Liberty International Underwriters (Liberty) have recently launched a product that provides optional extensions for both of these forms of contractual liabilities. 

Other professional indemnity underwriters have in the past purported to provide cover for contractual liabilities but in our experience this has been little more than marketing hype with such policies still containing an assumed liability exclusion. The Liberty policy is the first local product that we have come across that does provide meaningful cover in this area. 

With cover now being available many consultants have the option of transferring their contractual liability risks to an insurer. This does not mean that consultants no longer need to be concerned with managing their contractual liability risk. With only one provider this is an extremely limited market and consultants should still take appropriate steps to manage their contractual risks by avoiding or mitigating the risk in the first instance with transfer of risk to an insurer being the fallback position. 

To the extent that any of the above content constitutes advice, it is general advice without reference to your needs or objectives and therefore cannot be relied upon. Before acting on the above information you should obtain advice specific to your needs.



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