Stop! Don’t Sign That Contract Just Yet
If you are a business owner, signing contracts is part and parcel of the daily running of your business. Whether it be contracts for firms providing goods or services for your business, or your business providing goods and services for another firm, it is not uncommon to frequently enter into contracts with other businesses.
What most people do not consider however, is the potential risk you are placing upon both your business and personal assets in doing so.
What Is Contractual Liability?
Due to its complex nature, Contractual Liability is an area of insurance that is not easily understood.
In order to explain one aspect of contractual liability, let’s take a look at a brief example.
You’re a sub-contractor who has won a tender to carry out work on the construction of a new building. You have been engaged by the principal contractor who has asked you to sign a contract for the works provided. The contract will typically address;
- Who the contract is between
- Scope of works
- Your responsibilities
The contract will also discuss the ‘General Conditions’ or the ‘fine print’ and this is where you can get caught out.
Being a contractor, it is more than likely that you already hold your own insurance policies such as public liability and professional indemnity.
What is little known by businesses is that with a number of insurers, your own insurance policies are only applicable in the absence of any contract, guarantee, warranty or agreement.
This essentially means that any contract containing wording or clauses, particularly an indemnity clause, could nullify your own insurance policies. This is what a typical exclusion looks like on a Public Liability policy wording;
3.6 Contractual Liability
which has been assumed by You under any contract or agreement that requires You to:
(a) effect insurance over property, either real or personal.
(b) assume liability for, Personal Injury and/or Property Damage regardless of fault; provided that this exclusion shall not apply with regard to:
(i) liabilities which would have been implied by law in the absence of such contract or agreement; or
(ii) liabilities assumed under Incidental Contracts; or
(iii) terms regarding merchantability, quality, fitness or care of Your Products which are implied by law or statute; or
(iv) liabilities assumed under the contracts specifically designated in the Schedule or in any endorsement(s) to this Policy.
Keep in mind that every insurance policy is different and the above excerpt is a generic sample only.
Don’t Put Pen To Paper Until You Have Spoken To Your Broker
The best practice for ensuring that you are not subject to contractual liability is to always consult with your insurance broker prior to signing any contracts.
Your insurance broker will review the contract to determine what implications this may have on your existing insurance policies. Furthermore, they will also arrange for specialist third party advice to complete any necessary legal reviews.
Without doing so, you may unknowingly be assuming the liability of the other contracting party in the event of claim. For example:
Let’s assume that Party A is you as the sub contractor, Party B is the main contractor overseeing the construction project and Party C is principal construction company.
By signing a contract with an indemnity clause, Party A may be agreeing that if Party B is sued by Party C, Party A will be responsible for indemnifying Party B for the costs that may result from Party C’s claim.
Having to cover the costs associated with a claim of this nature may be potentially devastating for a small, family owned business.
What If I Have Already Signed A Contract?
If you have already gone ahead and entered into a contract prior to having your insurance broker review the relevant clauses, it is still recommended that you do so.
Your broker can then point out any areas of potential contractual liability so as to have an understanding of your current exposure.
This main piece of advice to take away from this example is to always have your insurance broker review any contracts your business may be entering before signing to avoid any nasty surprises in the event of a claim.
If you would like some further information and advice relating to contractual liability, please contact us.
DISCLAIMER: The content discussed in this blog is intended for the provision of general insurance related information only and does not take into consideration unique personal circumstances. Please contact us to discuss your personal insurance requirements before acting upon advice or purchasing any products.
