What are the key Public Liability Insurance issues for you when you agree to sign a commercial contract?
Public liability insurance insures against legal liability for property damage and/or personal injury suffered by a third party person (whether due to negligence or otherwise).
You may be asked to arrange public liability insurance to comply with a commercial contract you have entered into - including a lease, licence agreement, construction contract, subcontract, supply agreement, loan agreement, services contracts, manufacturing contract and many others.
There are some common areas where a commercial contract may conflict with the terms of your public liability insurance policy.
If the description of your business activities is incorrect or too narrow, the insurer can easily deny the claim. It is important to check the services to be provided under a contract and contact your broker to discuss with them whether those activities come within the business description in your policy.
It is also important to keep your broker informed of any changes to their business activities. Even the slightest change to business operations might render a public liability insurance policy ineffective to meet a claim.
Example1: a client told their broker that the business was manufacturing drilling equipment and mid-term the client began to fabricate underground re-fuelling stations. The client didn't tell their broker about the change - this is a monumental change to the risk profile and the insurer did not agree to insure the client!
Example2: a client held a farm insurance pack which also had public liability insurance. The client wanted to use the policy to cover tourism activities (eg farm stay). The farm pack policy did not cover these activities without an extension from the insurer.
A full copy of the contract should be given to your broker so they can assess the services you have agreed to provide under contract and work out whether the scope of those services comes within the business description in your policy schedule. This also allows your broker to make changes to the policy by contacting the insurer to add to, or vary the services covered in that business description.
Insurers can be reluctant to "name" a person (or principal) on a policy unless they can collect adequate underwriting information about the principal and the project/contract to ascertain the risk profile and to calculate premium. Often there will be an additional charge for this.
Sometimes a principal might ask to be treated as a joint insured, or a co-insured and this type of status is similar to "named insured" status.
This can be expensive and sometimes insurers will not permit this except for insured's with high limits of indemnity. It is not always in your best interests to name the other contracting party on your policy.
Often a better alternative to allowing the principal to be insured on your policy with Principal's Liability cover. This is where the insurer provides cover for the principal for any liability that they may incur as a result of the work you perform.
Many public liability insurers3 provide Principals Liability cover automatically, or on request (in which case the name of the principal will be shown in your policy schedule). In some cases, Principal's Liability cover can insure the principal for their own negligence provided there is a causal connection to the work you perform.3
Ask your broker for more information about the differences between "named insured" and interested party status4 and whether you have Principal's Liability cover which is suited to the contracts you sign.5
Some contractual indemnities are very broad, requiring you to assume liability for loss or damage that is not within your reasonable control.
Some indemnities are so broad that they extend to loss or damage:
Example5: "The Contractor will indemnify the Principal against any liability, loss, damage, claim, suit, action, demand, expense, proceedings of whatsoever nature whether arising under statute or common law in respect of:
(i) personal injury (including illness and disability), or death of any and all persons;
(ii) loss or destruction of or damage to or loss of all property real or personal (including but not limited to the property of the Principal), arising from the Contractor's presence on the site or, out of or, in the course of or, caused by the execution, performance or purported performance of work under the Contract or other obligations hereunder directly or, indirectly associated therewith."
Very broad indemnities will almost always trigger the 'assumed liability' or 'contractual liability' exclusion in a public liability policy, especially if the indemnity clauses in the contract do not provide for proportionate liability. If this happens, it is unlikely that you will be covered for the entire amount of a claim made by the principal in reliance on the indemnity in the contract.
Getting the right legal advice on whether claims made under the indemnity will be covered by insurance is vital to avoiding the risk of uninsured losses. If these losses will not be protected by the insurance, the principal is usually more willing to change the indemnity clause.
Your broker can help you access specialist legal advice on your contracts which can help you to 'align' the contractual indemnities with your legal liability and the cover provided under your policies.
It is common practice for insureds to request that a contract be "noted" on the policy. It is a complete fallacy that this leads to automatic coverage for the indemnities provided and other clauses under the contract.
If the policy would not have covered the contractual obligation or indemnity in the first place, merely noting the contract will not make the insurer liable to pay a claim that is made against you.
The only way to amend the terms of the policy is for your broker to negotiate with the insurer to have the policy endorsed. Any endorsement under which you seek to have a contract "designated" should be carefully drafted to ensure that the assumed liability or contractual liability exclusion does not operate in relation to the contract.
In many cases, the insurer will not agree to do this unless the indemnity clauses are reasonable, (ie not too broad). Generally, the indemnity in the contract needs to be consistent with your liability at law (eg it should apportion liability proportionately between the parties, relative to their responsibility for the loss).6
The best way for you to manage this risk is to get advice from your broker about your policy coverage and the risks of covering other parties under your policy.
You might also require specialist legal advice on the correlation between the contract and the insurance policy. If there are gaps in cover, have the contract changed to ensure that in most cases, the policy will respond. If this is done effectively, the insurer may be willing to "note" or "designate" the contract on your policy. Your broker can help arrange by referral to specialist lawyers.
Sometimes there will be cover within your policy for contracts with governmental bodies, utilities or where you sign a lease. Cover for 'incidental contracts' can be useful, but care is needed because often there is no cover for lease liability if you agree to indemnify the landlord regardless of fault.
If a contract cannot be 'noted' by the insurer and there is no protection for it, you might consider speaking to your broker about contractual liability cover. Depending on the types of contracts you sign, you may require more extensive insurance than a policy which covers you for contracts that are entered into in the course of your trade, profession, occupation or business. This is available through specialist policies which provide excess of loss and/or umbrella cover.
Most contractual liability policies will continue to reference the exclusions that appear in your public and products liability insurance so there will still be no cover for fines, penalties, certain types of consequential loss even if you have assumed responsibility for these things under contract. It is also important for you to mitigate your exposure for uninsured contractual liability by excluding liability for these types of losses and negotiating a financial cap on liability in the contract.
Sub-contractors and sub-consultants have their own legal duties and liability (eg liability in negligence for property damage or personal injury).
In most cases, a policy will cover you for your vicarious or contingent liability for the acts or omissions of your sub-contractors or sub-consultants, but will not cover any primary or direct liability the sub-contractors or sub-consultants have to a third party without a specific endorsement or unless the subcontractor is a named insured.
In most cases, it is better to require sub-consultants and sub-contractors to have their own public liability insurance policy, than to have them covered under the same policy. You may need to make changes to the contractual requirements relating to sub-consultants or sub-contractors to be allowed to have each sub-consultant and sub-contractor maintain their policies instead of being covered under yours.
In some cases it may be appropriate to extend your insurance to cover sub-contractors and sub-consultants for their direct liability to a third party for negligence -for example labour hire arrangements.
This is more common when the sub-consultant or sub-contractor is working for you, under your direction. Sometimes this type of coverage is available in specialist policies - for example policies used by the fire protection sector.
Ask your broker to review your contracts and provide insurance advice. Your broker can also help arrange a legal review of your contracts.9
1. This example comes from a paper presented by Cohn Todhunter (Strathearn Insurance Brokers) at an AILA Seminar held in Perth on 17 May 2006.
2. This example was a query by one of the Steadfast brokers through the Contractual Liability Helpline. The farmer was asked to sign a licence/lease to have permission to offer tourism activities on an adjoining property owned by the Crown. If the insured had not sent the contract to their broker, they would have been uninsured for these activities and in breach of the contract.
3. A recent NSW case of GlO General Ltd u Centennial Newstan Pty Ltd  NSWCA 13 demonstrates that an expansive principals liability clause in a public liability policy can actually insure the principal for its own negligence if this is what is required in the contract terms between the principal and the insured.
4. The Steadfast General and Products Liability policy provides principal's liability cover automatically and on similar terms to those considered by the court in GIO General Ltd v Centennial Newstan Pty Ltd.
5. Vicarious liability doesn't often arise when one person performs work for a principal under a contract unless the person performing the work is acting as agent of the principal. Often parties to a commercial contract will be independent contractors and not principal and agent.
6. Our Tipsheet 7 details the differences between named insureds, interested parties and noting interest on a policy. Ask your broker for a copy.
7. This example comes from a paper presented by Greg Pynt (Pynt & Partners) at an AILA Seminar held in Perth on 17 May 2006.
8. If you are not familiar with proportionate liability, ask your broker.
9. Ask your broker for more details on contractual liability cover.
For further assistance, contact:
Liability Brokers Pty.Ltd.
Freecall 1300 881 779
This Tipsheet has been prepared for Steadfast Group Limited and its brokers. It contains general information about contractual liability issues. It is not tailored to the individual circumstances of any recipient and is not a substitute for obtaining specific advice about the contractual liability issues that arise in your business.
© 2016 The Fold Legal Pty Ltd
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Who Needs Public Liability Insurance?
Tips & Traps when signing Contracts