CONTRACTS THAT MAY AFFECT YOUR INSURANCE

Introduction: One of the largest exposures for any person, entity or other organisation arises from the way that they organise and/or enter into and manage its contract. For the sake of this explanation we shall refer to the word "organisation" to encompass persons and entities taking out insurance. A contract is formed at any time where there is an agreement between two or more parties. It can be set out in writing or agreed verbally. An organisation enters into contracts all the time, when it employs people, buys or sells goods, purchases services, leases a hall or premises or any other time when it makes some form of agreement with another party. The terms that you agree to in your contracts can greatly affect your liability exposure. Indeed, liability may occur under contract and this liability may be greater than the liability that would ordinarily apply if there was no contract in place. There are two main ways that additional liability may occur from contracts that you enter into: Where a party agrees to accept responsibility for matters for which they have no legal responsibility; or Where a party agrees to waive certain legal rights they may have with regard to another party. Problem Areas Some primary problem areas with regard to public liability in contracts are as follows. Indemnity The contracts may include an indemnity clause, which will state that you take responsibility for anything that happens, regardless of the cause, in connection with the contract. In effect, this is saying that you will be liable for anything that happens even if you did not cause the incident which, in most public liability policies will void the cover.   Example DEF Charity Inc hire the local hall to run an information session. As part of the hire they sign a hire contract that includes an indemnity clause that says that they agree to indemnify the owner of the hall for anything that happens while they are using the hall. At first look it does not appear too onerous. Whilst DEF are running their session, a member of the public slips and is injured on a loose floorboard of the hall. Because DEF signed the contract saying that they will indemnify the owner for anything that happens whilst using the hall, DEF will now be liable for the injured person's costs and expenses. DEF are liable for something over which they had no control. Any indemnity clause that you enter into should clearly state that each party involved in the contract is responsible for their own negligence. It should not include anything that allows the transfer of legal liability from another party to your group because insurers will not be responsible to insure someone else other than the insured organisation unless specifically agreed first and only if any policy exclusion relating to this is waived. Types of contracts Contracts that do not increase the organisation's legal liability. Contracts regarding the use of land, premises or facilities. Contracts relating to the supply of goods or services. Contracts relating to the hire of equipment and plant. Hold Harmless (or waive the right of recovery). Joint/Co-Insured. Contracts that do not increase an organisation's legal liability. These types of contracts simply state that each party will be responsible for their own actions and negligence. Contracts regarding the use of land, premises or facilities. It may be a condition of the use of land or premises that the users will be responsible for any injury or damage arising out of such use. Under these agreements the user can incur liability for injury or damage that would normally be the responsibility of the party granting the use of the land or premises, even if the user has not been negligent. Contracts relating to the supply of goods or services. These usually come in two forms: either verbal contracts or preferably written contracts. Whilst verbal contracts are generally enforceable, they can be difficult to prove and are very easily disputed. You should consider putting a procedure in place to ensure all your organisation's contracts are in writing. By having written contracts you can help ensure that all the parties in the contract have a clear idea of what is expected of them. Contracts relating to the rental or hire of equipment and plant. These contracts can be very similar to contracts regarding the use of land, premises or facilities. The main requirement in a number of these contracts is the requirement that the hirer will be responsible for any damage to the equipment and/or plant. Whilst Public Liability Insurance can in some instances provide you with cover for damage caused by a negligent action that damages the equipment and/or plant, it can't provide a blanket cover for any loss or damage (this cover must be applied for specifically by approaching an underwriter and requesting its inclusion).   Example ABC Country Hall Inc hires a floor sander from a local hire firm to do some work on the local hall. In the hire agreement there is a clause that states that the hirer (ABC Country Hall Inc) is responsible for any damage to the floor sander. If the sander is dropped whilst it was being unloaded from the truck because ABC Country Hall Inc was not paying enough attention, it may be covered by their Public Liability Insurance as it is caused by their negligence. If, however, the sander is damaged by a fire whilst it is being stored in a building over night, the damage would probably not be covered by Public Liability Insurance as there has been no negligent act by ABC Country Hall Inc. There is a gap in the coverage thus, it is important you consider taking out property and contents cover, or you might simply rely on an endorsement to the public liability cover to include "Goods in Care Custody & Control" which in most cases should cover such a loss. We can help you with this gap insurance. Hold Harmless (or waive the right of recovery) A release or hold harmless clause, or a clause that states that you waive your right to recover any costs from another entity, has a similar effect to an Indemnity Clause. It means that you agree not to pursue the other party for any costs that you may incur due to their actions.   Example GHI Hair Salon Inc hires a contractor to help install an air conditioner at their salon. The contract contains a clause that states that GHI holds the contractor harmless for any anything that might happen. During the installation the contractor damages the wall to an adjoining business. The affected business's proprietor demands that GHI fix the damage. GHI then attempt to have the contractor pay to have the damage fixed, however the contractor refuses, citing the hold harmless agreement in the contract. GHI will have to pay the damages bill and unless the insurer has agreed to endorse the policy to not exclude "hold harmless agreements" it is likely the policy cover will be void. Again, you should ensure that none of the contracts your organisation enters into contains hold harmless agreements, and that each party is responsible for its own negligence. Joint/Co Insured The above terms usually occur in an insurance clause of the contract. The clause will state that you agree to include the other party as a joint or co-insured on your insurance policy; this essentially means that you agree to include the other party in your insurance policy with the same rights on the policy as your self, for example the right to claim on the policy. As a general insurance principal insurers, are not prepared to accept a public liability insurance policy which requires such a clause, because it has the potential to greatly widen their exposure to claims under the policy. Such a cause could also cause problems for your organisation as illustrated by the following example.   Example JKL Incorporated enters into a contract to manage a local hall with the hall trust. As part of the contract JKL agrees to include the trust as a joint insured under their public liability policy. A hall user gets hurt on some faulty steps leaving the hall. As JKL only manages the hall and they are not responsible for the maintenance of the hall, they refer liability to the hall trust who is responsible for maintenance. As JKL has included the trust as a joint insured on their policy, the trust then contacts JKL's insurer directly and makes a claim directly on JKL's policy, bypassing JKL. This claim will most likely be rejected by the insurer unless they have agreed to waive exclusions that may apply thus, JLK will not have the benefit of insurance cover and will be exposed to potential significant financial loss. Guidelines for management of contracts There are a number of ways that you can minimise and control your risk when entering into contracts include the following: Always try to put your agreements/contracts in writing; Restrict authorisation for the entering into of contracts to a limited number of appropriately trained/briefed people (written authorisation or minuted authorisation is best); Always check the contracts for the issues raised above; If you are entering contracts regularly consider designing a standard format for regular use; Make sure all contracts contain the following details - Who is entering into the contract (full legal names, street address, phone number at the minimum); - Full details of the goods and/or services that will be provided; - When the goods and/or services will be provided (specify start and finish times if applicable); - Where the goods and/or services will be provided (full street address); - Details of the cost of the goods and/or services and when this is expected to be paid; - An appropriate indemnity clause stating that each party will be responsible for its own negligence; - An insurance clause, which sets out that each party should take out its own appropriate insurance. You should also seek appropriate legal advice prior to agreeing to the contract. Note, the above information is meant only to be a brief introduction to matters concerning the potential affects of contracts on insurance cover. Contracts are often difficult and intricate documents to understand thus, it is always wise to consult a solicitor before entering into a contract of any description. In respect of insurance policies always make sure you examine whatever policy you take out so as to ensure that you are aware of the affect of contracts on the insurance cover including any exclusions, limitations and/or warranties concerning contracts.

 

Disclaimer: Rural & General Insurance Broking Pty Ltd while able to assist clients with lodgment of an insurance claim is not an insurance underwriting company and has no authority from any insurance underwriting company to administer insurance claims. Please check the section of your insurance policy, which describes claims procedures and what you must do in the event of a claim. Lodgment of a claim does not constitute an acceptance of liability by the insurance underwriting company. If you are left in any doubt please do not hesitate to contact our office on Ph: 1 800 227-473 or email us at office@rgib.com.au