Insurance Clauses in Contracts

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Insurance Clauses in Contracts
David Kent Snr Consultant Marsh Risk Consulting
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Indemnity and Insurance clauses

• Examples-
• Construction contracts
• Strategic alliances
• Warehousing contracts
• Distribution contracts
• IT services
• Leases and rental agreements
• Maintenance contracts
• Sale or purchase documents

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What things need to be considered before entering
into a contract?

• For example
• What are the risks?
• What are insurable risks?
• Is insurance required?
• Which policy type and what amount is appropriate?
  

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Contract - Indemnity Clause

• An Indemnity Clause is quite separate from an
  Insurance Clause.
• The Indemnity Clause is a contractual risk
  transfer in the form of an agreement between the
  Indemnitee (usually the principal) and the
  Indemnitor (usually the Contractor, licence
  holder, lease holder etc).
• It details the extent of liability securing the
  Indemnitee against loss or damage.

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EXAMPLE - INDEMNITY CLAUSE

• Tasty Treats Pty Ltd agrees to indemnify the
  State of Tasmania, which term includes the
  Secretary of the Department of X X X, its
  servants and agents in respect of any claim or
  liability for damages AND releases and discharges
  the State of Tasmania and its servants and agents
  from any loss or liability for property damage
  and/or injury which arises directly or indirectly
  out of the acts or omissions of Tasty Treats Pty
  Ltd or its servants or agents (but therefore NOT
  the acts or omissions of the State of Tasmania,
  its servants or agents) consequential upon the
  use or occupation of the land and/or premises on
  21 SEPTEMBER 2005 ...

Example clause only. Incomplete and not to be
relied upon.
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Contract - Insurance Clause

• A contract wording usually carries Insurance
  Clauses which set out the minimum level of
  coverage required to be effected by the
  Indemnitor and special provisions that are to
  apply to each coverage.
• Examples of some insurance covers
• Public and Products Liability Insurance
• Professional Indemnity
• Property Insurance
• Workers Compensation
• Compulsory Third Party (motor)
• Third Party Property Damage (motor)

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EXAMPLE - INSURANCE CLAUSE

• Tasty Treats Pty Ltd agrees to maintain a public
  and product liability insurance policy which
  names the State of Tasmania (which term includes
  the Secretary of the Department of X X X, its
  servants and agents) as an insured in respect of
  personal injury and/or property damage arising
  directly or indirectly out of the acts or
  omissions of Tasty Treats Pty Ltd.
• SPECIFIED INSURANCE
• 10M for any one occurrence during the policy
  period.
• quiz

Example clauses only. Incomplete and not to be
relied upon.
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Understanding Insurance Covers
David F. Kent Client Service Executive
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Industrial Special Risks (Property)

• Covers the Insured for
• physical loss destruction or damage to the
  insured property
• in some cases the costs incurred due to the
  interruption of your business activities arising
  from the loss of or damage to the insured
  property
• Some examples are
• Fire
• Storm
• Vandalism
• Theft / Loss
• Water Leakage
• Accidental Damage

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Public Products Liability Insurance

• A Liability Insurance policy will cover the
  Insured Organisation for LEGAL LIABILITY caused
  in the conduct of the business or operations
  arising out of
• Injury to Persons or
• Damage to Property (of 3rd parties)
• Typically an occurrence wording, e.g.
• if a writ is received in 2005 regarding an
  incident (event) that caused an injury to a
  member of the public in 1999, then the public
  liability policy which was in effect at the time
  of the loss in 1999 would respond to the claim.

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Examples

• A member of the public slips on a spillage at the
  premises
• A child is injured in a fall from playground
  equipment which was allegedly inadequately
  supervised
• Member of the public is injured due to collapse
  of playground equipment
• A salmonella-contaminated ham sandwich purchased
  from your canteen by a visitor causes food
  poisoning

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Professional Indemnity

• Professional Indemnity Policy covers legal
  liability arising out of a breach of duty owed in
  a professional capacity.
• Claims commonly arise where a third party
• Relies on allegedly negligently given
  professional advice or service, and
• In relying on that advice or service sustains a
  loss

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Professional Indemnity

• Joint Insured?
• Typically NOT possible to extend cover as Joint
  Insureds. A stand-alone Project Specific PI
  policy, naming all insured parties, is possible
• Unless held harmless the Client retains the
  indirect benefit of being able to recover for
  damages to the extent that they are caused by the
  contractor who in turn may recover from his PI
  insurer.

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Professional Indemnity

• Typically a "claims made wording, e.g.
• if a writ is received in 2005 regarding a
  financial loss (event) arising from an
  inappropriate design in 1999, then (assuming that
  there were no prior indications of the claim) it
  is the 2005 policy which would respond.
• Specified as being required by the contractor for
  a period of no less than 6 years after the
  completion of the project/contract.

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Motor Vehicle

• Compulsory Third Party (CTP)
• Coverage for injury to 3rd parties
• Evidence of the Contractors vehicles being
  covered by CTP insurance is often overlooked.
• Vehicles operate in another State, additional
  evidence is required.
• Third Party Property Damage (TPPD)
• Coverage for damage to 3rd party owed property

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Liability Wordings

• Claims Made vs Occurrence
• Occurrence
• Insurer is on risk both during the policy year
  and into the future for claims arising from
  incidents/losses arising from a particular policy
  year, ie, No sunset insurer can never
  confidentially close his book on that year eg,
  old asbestos in USA and Australia.
• Claims Made
• Insurer is on risk only during the stated policy
  period for
• - Claims arising during the policy year, and
• - Claims first made against the insured (and
  notified to the insurer) during the policy year
  arising from events/losses in prior years.
• Thus insurer is providing current cover and
  limited retrospective cover only and can close
  his book at the end of the policy year.

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Liability Wordings (cont.)

• Claims Made
• Implications for the Insured
• 1. If insured
• Receives a claim, or becomes aware of an event
  that may give rise to a future claim during the
  policy year and does not notify the insurer
  within the policy year.
• No Cover
• 2. Insurer has the ability to limit the scope of
  the retroactive cover it offers based upon its
  knowledge of the insureds past operations.

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Indemnity Clause - Consequential Loss

• Typical contract negotiations involve refusal to
  accept liability for consequential loss. Many
  hours can be spent arguing over the exclusion or
  limits for consequential loss .
• To be effective, there should be a clear
  definition of what consequential loss or
  indirect or pure financial loss means.
• Perre v Apand Pty Ltd (1999)
• Potato growers were forced to sell potatoes at
  cheaper prices as they were prevented from
  selling their produce to more lucrative markets
  because of quarantine restrictions applied
  following bacteria wilt damage to potatoes at a
  neighbouring property. It was decided that this
  was indirect or pure financial loss and was not
  recoverable under a public and products liability
  policy

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Consequential loss cont.

• Public Liability insurance already provides
  coverage for direct consequential loss.
• All liability policy wordings exclude coverage
  for indirect or pure financial loss
• Consequential Loss is economic loss that is a
  direct consequence of and is linked directly to
  injury or damage to the property of the claimant
  .
• Indirect or Pure Financial Loss is financial
  loss that does not result from injury or damage
  to the property of the claimant but of some other
  party.
• Which policies Public Liability, 3rd party
  liability coverage of Motor Vehicle, and PI
  coverage of Marine policies

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Insurance Certificates and Documentation
David F. Kent Client Service Executive
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Disclaimer

• This communication is intended to provide general
  information on either indemnity or insurance
  provisions of contract(s) or both in summary form
  from an insurance perspective.
• The contents do not in any way constitute legal
  advice and should not be relied upon as such.
• Marsh recommends you seek formal legal advice in
  connection with this matter.

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Insurance Certificates
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Risk Management Hierarchy of Insurance

• Optimum (requires consideration of policy
  structure)
• Named as a co-insured/additional insured
• Limited Alternative
• Named as a principal
• Minimum
• Provision of proof of coverage
• NOTE
• In all cases proof of coverage must be sought,
  reviewed, recorded and retained.

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Hierarchy of Insurance Conditions
Insurable Risk
Additional Insured
Principal
Interest Noted
Uninsurable risk (speculative and
non-speculative))
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Named as a co-insured (additional insured)

• Difficult to obtain as it entitles the co-insured
  to all rights of coverage and obligations as an
  insured
• Effective need for Waiver of Subrogation Clause,
  Cross Liability Clause, Breach of Conditions
  Clause (alternatively a Severability Clause /
  Non-Vitiation Clause) and Primary Cover Clause.
  Consideration of a Security of Insurer Clause.
• Unless qualified, the named party becomes an
  insured under the policy to the full extent of
  their operations/products. Including the need to
  comply with the terms and conditions of the
  policy such as-
• (a) reasonable care
• (b) notification of claims
• (c) changes in risk
• (d) duty of disclosure
• (e) payment of premium

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Named as a principal

• Broadform Liability wordings may include in a
  Definition of Insured along the lines of -
• any principal in respect of the liability of
  such principal arising out of the performance by
  the Insured or by any party designated in
  paragraph (b) above, of any contract or agreement
  for the performance of work for such principal,
  but only to the extent required by such contract
  or agreement
• the Principal becomes a third party beneficiary
  but only to the extent that the direct Insured
  causes the Principal to incur a legal liability
  in respect of work performed by the direct
  Insured
• NO INDEMNITY is provided to the Principal for
  their own liability which may arise because of
  the actions of the Principal.

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Noting a Party's interest

• Annual sighting of proof of coverage
• Noting of a party's interest under the policy by
  endorsement without qualification as to what that
  interest or reference to any a contract condition
  leaves the extent of indemnity unclear
• Legal implications of noting is uncertain
• The notation can be argued satisfy the disclosure
  obligation when dealing with an underwriter.

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Key Points

• Contract conditions
• documentation names the contracted party
• type(s) of cover required
• limit of indemnity
• special conditions eg. co insured, interests
  noted
• Authorised insurers - www.apra.gov.au
• if not APRA listed then refer to in house
  insurance advisor, legal advisor, Crown Law, TRMF
  Fund Administration Agent (Marsh) for further
  consideration and advice.
• Not being listed on the APRA website should
  raise a flag but is NOT a deal breaker

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Example of checking procedure
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GUIDELINES FOR DETERMINING APPROPRIATE LEVELS OF
INSURANCE FOR GOODS AND SERVICES CONTRACTS
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Risk Management Process
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Scenario Information Technology
Contract Requirements Design of a central database to store large quantities of student data including fees paid and prior subject history
Outputs Specifications and documentation Information system
Contract value 20,000
Risk Project failure
Insurance Required 10,000,000
Factors History of success with project delivery Member of Australian Computer Society
Residual Risk - Insurance
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Information Technology
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Information Technology
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Information Technology
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Step 3 Examine Controls
Excellent More than what a reasonable person would be expected to do in the circumstances
Adequate Only what a reasonable person would be expected to do in the circumstances
Inadequate Less than what a reasonable person would be expected to do in the circumstances
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Information Technology
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Information Technology
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Scenario Bacterial Culture Transportation
Contract Requirements Manufacture of commercial fish vaccine from bacteria supplied by the Crown
Outputs Material transfer agreement
Contract value 100,000
Risk Loss of farm production outbreaks, mortality rate, accidental release Adverse reaction - Workers
Insurance Required 20,000,000 Public and Products 10,000,000 Professional Indemnity
Factors History of success with vaccine production HACCP accreditation Financial strength
Residual Risk - Insurance
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Bacterial Culture Transportation
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Bacterial Culture Transportation
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Bacterial Culture Transportation
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Scenario Roadside Maintenance
Contract Requirements Maintenance in and around visitor centre at Hastings Cave
Outputs Mowing, whipper snipper of grass
Contract value 20,000
Risk Public road People and vehicles Projectiles stones, glass Machinery feet, eyes, hands
Insurance Required 20,000,000 Public and Products
Factors Contractor No insurance Work process after hours?
Residual Risk - Insurance
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• Questions