Title: Insurance Clauses in Contracts
1Insurance Clauses in Contracts
David Kent Snr Consultant Marsh Risk Consulting
2Indemnity and Insurance clauses
- Examples-
- Construction contracts
- Strategic alliances
- Warehousing contracts
- Distribution contracts
- IT services
- Leases and rental agreements
- Maintenance contracts
- Sale or purchase documents
3What 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?
4Contract - 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.
5EXAMPLE - 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.
6Contract - 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)
7EXAMPLE - 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.
8Understanding Insurance Covers
David F. Kent Client Service Executive
9Industrial 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
10Public 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.
11Examples
- 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
12Professional 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
13Professional 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.
14Professional 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.
15Motor 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
16Liability 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.
17Liability 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. -
18Indemnity 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
19Consequential 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
20Insurance Certificates and Documentation
David F. Kent Client Service Executive
21Disclaimer
- 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.
22Insurance Certificates
23Risk 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.
24Hierarchy of Insurance Conditions
Insurable Risk
Additional Insured
Principal
Interest Noted
Uninsurable risk (speculative and
non-speculative))
25Named 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
26Named 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.
27Noting 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.
28Key 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
29Example of checking procedure
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31GUIDELINES FOR DETERMINING APPROPRIATE LEVELS OF
INSURANCE FOR GOODS AND SERVICES CONTRACTS
32Risk Management Process
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35Scenario 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
36Information Technology
37Information Technology
38Information Technology
39Step 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
40Information Technology
41Information Technology
42Scenario 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
43Bacterial Culture Transportation
44Bacterial Culture Transportation
45Bacterial Culture Transportation
46Scenario 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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