Tipsheet 2 Insurance Clauses Pitfalls for brokers

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1 Tipsheet 2 Insurance Clauses Pitfalls for brokers Broker Version Updated September 2010 Some common pitfalls experienced when reviewing insurance clauses in client s contracts. How can brokers help? Brokers are often asked to review the insurance clauses in a client s contract to confirm that the insurance the broker has placed meets the contract requirements. Examples: The insurance must cover all liability to pay damages or compensation arising out of any injury or death to a person or any loss of or damage to (including resulting loss of use) any property howsoever caused. The insurance must cover each insured for their respective rights and interests covering all liabilities, whether arising under statute or common law, in relation to the death of, or injury to, employees or any person deemed to be an employee. Such a review usually requires consideration of: how the insuring clause in the policy operates; whether exclusions and other conditions apply based on case law and legal principles of policy interpretation; whether the policy meets the contract requirements; whether the insurance required under the contract is available in the insurance market. These types of reviews should be undertaken by a lawyer who specialises in contract liabilities and insurance working with a broker. What can brokers safely tell clients? If asked, brokers can: Advise whether the insurance described in the contract is available on reasonable commercial terms in the current market. Confirm insurance is in place by getting a certificate of currency from the insurer. Provide details of the sums insured/limits of liability, excesses and reinstatements by checking the policy schedule/coverage summary. Advise whether appropriate endorsements have been obtained - eg insured vs insured endorsements, interested parties noted by checking the policy schedule and any other endorsements to the policy. Advise whether the insurer meets a credit rating requirement in a contract by checking the current credit rating for the insurer through a credit rating agency like Standard and Poors, A.M. Best or Moody s. Advise whether the business description for the insured is adequate for the services/goods to be provided under the contract by reviewing the policy schedule and checking with the insured that no changes have been made to their business activities.

2 If it is borderline or requires some interpretation of how the policy works or what the contract means, contact the helpline or refer your client to a lawyer who can advise on the insurance issues. On what areas should brokers not advise? Brokers should not advise on whether a policy is adequate to meet the requirements of an insurance clause in a contract - unless you have particular expertise in this area or you are working with a lawyer to provide this advice to your client. The indemnity and insurance clauses are obvious areas that impact on whether the policy will respond to claims made under the contract. What is less obvious is that there are usually other legal obligations scattered throughout a contract that impact on your client s policy. Brokers should refrain from: Giving an opinion to a third party as to whether an insurer is reputable or solvent; Reviewing the indemnity and hold harmless clauses this is the territory of lawyers; Reviewing an entire contract to see whether the policy will respond - this requires a detailed legal analysis of all of the contract terms; Agreeing to have the contract noted on the policy unless the terms of the endorsement operate effectively to immobilise the contractual liability exclusion more on this below. What types of insurance are usually required? Before we look at the common pitfalls, let s review some of the types of insurance that your client might be required to hold. Depending on the extent of the services or products to be provided, your client may be required to hold a broad range of policies including: Public Liability; Professional Indemnity; and Workers Compensation / Employer s Liability. But some contracts (particularly for large government, commercial, mining or industrial projects) may also require: Contract/Construction Works Products Liability Employment Practices Liability Management Liability Director s & Officer s Insurance Contractor s Plant Goods in Transit Motor Vehicle /Third Party Liability Often the other party to the contract treats the policies as if they have been purchased exclusively for the contract! This is almost never the case because the client usually purchases the policy to cover all of their contracts and business activities. This is why it is often better to make changes to the insurance requirements in the contract than to change the terms of the insurance policy. What are some of the common pitfalls of insurance clauses? Let s look at some common requirements in insurance clauses: Examples: The policy must be placed with a reputable insurer. What is meant by reputable? Who decides whether one insurer is reputable

3 and another is not? It is usually better to have the identity of the insurer approved by the other contracting party or to set more objective criteria ie insurance must be placed with an Australianregulated insurer with a credit rating of A+ or more. The policy must name the other contracting party as an interested party or an insured. This is often required for public liability insurance, and sometimes other classes. For risk management reasons, it may not be a good idea for the client to name the other party on their policy. The other party can claim under the policy and exhaust the limit of liability on a policy that is used for the client s entire business (ie one that is not arranged exclusively for the contract). For professional indemnity insurance, a more pressing concern is an insured vs insured exclusion. This type of exclusion prevents one insured from suing or making a recovery against another insured. It can result in your client being uninsured for disputes with the other party if they are a named insured. This is one of the reasons why most PI insurers will not name the other contracting party as an insured under your client s policy. As an interested party also has the right to claim on the policy, PI insurers will usually refuse to note the interest of another party. Other types of liability insurers may be willing to do this. If your client is performing work under a contract, it is often better and easier to have the other party insured as a principal for principal s liability. i Having the contract noted, endorsed or added to the policy does not always ensure that a claim relating to the contract will be paid. Check the terms of the endorsement carefully to ensure that the contract has been properly designated otherwise the contractual liability exclusion may still apply. The public liability policy must provide cover with a limit of liability of $20m for any one occurrence. Often a contract will require your client to hold a certain amount of insurance for example, $20m. Public liability insurance may have sublimits for certain claims (eg property damage where the property is in the temporary care or custody of the insured or pollution claims). For example, the Steadfast General and Products Liability Policy contains a $250,000 sublimit for liability claims for damage to property in the insured s care, custody or control. This means the policy doesn t provide $20m of cover for any occurrence. We recommend that your clients have this noted in the contract, so that they will not be in breach of contract. The policy must require the insurer to notify the other party if the policy has lapsed, is varied or has been cancelled. This can be difficult because the insurer will not agree to give notifications to a person who is not the contracting party for the policy. Recommend that your client seek to change this type of clause to permit them to notify the other party if changes are made or if the policy is lapsed or cancelled. Clients may look to you as their broker for assistance and you need to actively manage this requirement for your client.

4 The client must not do anything that would jeopardise payment of a claim (ie nondisclosure or misrepresentation) It is very difficult for clients to agree not to do anything that would jeopardise payment of a claim. Such a requirement really does stitch up the client because it gives the other party another basis to sue them ie in a scenario where the policy conditions have not been met. Consider what would happen to a client who didn t notify a PI circumstance inside the policy period? The claim could be denied and then the other party could also seek a further indemnity for loss/damages/expenses because your client didn t make the notification! Recommend that the client seek to have this obligation deleted. The policy must also insure subcontractors, sub-consultants and other agents. Usually a policy will cover your client s vicarious liability for the work of the subcontractor but not the primary liability of the subcontractor unless the subcontractor is specifically named under your client s policy. Insurers are generally reluctant to cover the subcontractor s primary liability without further underwriting. Again for risk management purposes, it may not be a good idea for everyone to be covered under the same policy. To avoid a breach of contract and uninsured losses, recommend that your client seek to have this requirement limited to cover for its vicarious liability for contractors etc. In most cases, the other party will accept an arrangement where the subcontractors hold their own insurance.this can be recommended as an alternative to this type of clause. The insured must maintain insurance after termination or expiry of the contract. Run-off requirements are fairly standard but an unlimited run off period is unreasonable and impracticable. At the most, the client should agree to hold insurance for 7 years from the conclusion of the work/contract. This is consistent with the maximum statutory limitation period for most legal actions. The policy must provide primary cover to the other party as the first beneficiary under the policy or the insurer must agree to treat the policy as a primary cover and any policies held by the other party shall operate as excess levels of insurance. This is an example of a contract requirement which is rarely met by the insurance market. ii The principle of contribution between insurers is clear iii and many insurers will not agree to treat your client s policy as the primary layer of cover unless the insurance is a project specific policy. The insurer must waive all express and implied rights of subrogation against the other contracting party or the policy must contain a waiver of subrogation and cross liability clause. The right of subrogation allows the insurer to seek recovery against other parties who may be legally responsible for the loss or damage. Once the insurer has indemnified the insured for its loss, the insurer steps into the shoes of the insured and can take whatever legal action is available to the insured.

5 A waiver of subrogation clause precludes the insurer from bringing a legal action against another insured under the policy. Even where more than one party is insured, their respective rights and responsibilities can differ. In such cases, the insurer may need to preserve its subrogation rights. A cross liability clause is where the insurer agrees to treat each person insured under the policy as if a separate contract of insurance had been issued to them. The two clauses are different often a contract will ask for a cross liability clause that waives the insurer s rights of subrogation. Many insurers will argue that it is unnecessary to include a waiver of subrogation if there is a cross liability clause already in the contract. iv It is often possible to have these types of clauses included in a construction works or public liability policy, but not in a PI policy. v Usually the insured must preserve the insurer s rights of subrogation. Check the policy and consult the insurer if your client s contract requires these types of clauses. If the insurer is unwilling to include these clauses, the contract requirements should be changed. All policies arranged must be on a losses occurring basis Public liability insurance is usually provided on a losses occurring basis or occurrence basis. Other policies like professional indemnity insurance are typically sold in the Australian market on a claims made or claims and notified basis. Don t forget to check whether it is possible to obtain insurance on the basis required in the contract. The contract may need to re-drafted to reflect what is available. The policy must have unlimited cover or unlimited reinstatements What can we say!!! Is there such a thing as unlimited cover?? Why do contracts have these crazy requirements? It defies logic that any commercial insurer would be prepared to give someone unlimited cover or unlimited reinstatements at a price that is affordable. Ask the other party to specify how many reinstatements are required or how much insurance is needed, taking account of the commercial availability of the insurance and the risk to the parties. The client must hold and maintain adequate insurance to cover the risks of the contract or the indemnity clauses in the contract. Most PI policies will exclude claims for a failure to insure. This means if the client has a contractual responsibility to purchase adequate insurance and a claim is made for failing to do this, there is no insurance to meet that liability. There can also be issues with the contractual liability exclusion in liability policies because the contract may contain indemnity clauses or releases which adversely affect the insurance cover and its ability to cover the risks of the contract. vi These types of clauses should be removed from the contract where possible. The parties should work with their brokers to formulate more precise insurance requirements for the contract. If this type of clause cannot be removed, the client should be informed there is no insurance to cover this failure.

6 The client must inform the other party of any occurrence that gives rise to a claim under the policy and keep the other party informed of subsequent developments concerning the claim This is a fairly standard requirement in a contract but it can present a problem where the claimant is the other party to the contract. Surely this clause should not compel your client to give the other party sensitive information about the claim they initiated? The clause doesn t recognise that the notification requirement should not apply where the claimant is the other contracting party or where it would prejudice your client s legal position to disclose information about the claim. In some cases, your client may not be able to disclose information about the claim to another person without the insurer s consent. If the client fails to maintain the policies approved by the other party, the other party may take out the insurance and deduct the costs from the fees due and payable to the client and/or treat the failure as a default. This clause doesn t recognise that your client may change its policy and insurer from time to time. For example, change insurers because the terms are better. If this happens and the amount of insurance and cover under the new policy is consistent with what is required under the contract, there should be no grounds for the other party to treat the change as a default. Commonsense should prevail but the words in the contract may not assist your client! These are just some of the insurance clauses Gold Seal have seen. We would love to see other examples please send them to us! General tips for brokers reviewing insurance clauses If you are comfortable providing a review service to clients - make sure the client sends a full copy of the insurance clauses in the contract. No one is an expert at everything - work out the level of information/advice you can provide comfortably without giving legal advice. Advise your client in writing on the areas where the insurance doesn t meet the contract requirements and where changes to the policy cannot be negotiated, so the client can try to have their contract changed. It is in the interests of both parties to understand what the insurance covers and whether the insurance required in the contract is available in the market. Recommend the client takes legal advice on the contract particularly if it seems long, technical, complex or onerous. Aside from the obvious difficulties you may have in obtaining changes to the insurance policy, sometimes legal advice is a good idea. Often lawyers can assist by re-negotiating the contract terms so the current policies are sufficient or can interpret the extent to which the policy meets the contract requirements. Don t put your PI at risk by giving advice on drafting changes to the contract. Lawyers who are experts on commercial contracts are not always aware of the impact they have on insurance policies. If you are not comfortable reviewing the contract or would like specialist advice, contact the Helpline on. Gold Seal can also arrange a legal review of the contract for your client through the Steadfast Contract Review Service.

7 i For more details about the differences between named insured and interested party, see Tipsheet 7. ii This type of arrangement would have to be agreed by the insurer by way of endorsement because it would require the insurer to agree not to seek contribution from the second insurer and/or a written acknowledgement that the second policy operates as an excess layer of cover. iii A recent case of QBE Insurance (Australia) Limited v Lumley General Insurance Limited [2009] VSCA 124 confirms the position that where more than one insurer agrees to insure the same risk each must contribute a rateable proportion of the claim even if one of the insureds has agreed not to claim on the policy under the contract. iv This is because an insurer will not exercise its rights to make a recovery against one insured that is legally liable to another insured because it has agreed to insure both of them under the same policy.. v Sometimes the insurer may need to pursue a dishonest insured to make a recovery from a claim paid in respect of an innocent insured under the policy. vi Contractual liability cover is not widely available in the Australian insurance market and unless indemnity clauses and releases in the contract are re-drafted to more closely reflect the client s liability at law in the absence of the contract, it is unlikely that the policies held by the client will cover all of the risks and obligations assumed under contract.