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Insurance Clauses in Contracts

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Title: Insurance Clauses in Contracts


1
Insurance Clauses in Contracts
David Kent Snr Consultant Marsh Risk Consulting
2
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

3
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?

4
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.

5
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.
6
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)

7
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.
8
Understanding Insurance Covers
David F. Kent Client Service Executive
9
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

10
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.

11
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

12
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

13
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.

14
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.

15
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

16
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.

17
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.

18
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

19
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

20
Insurance Certificates and Documentation
David F. Kent Client Service Executive
21
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.

22
Insurance Certificates
23
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.

24
Hierarchy of Insurance Conditions
Insurable Risk
Additional Insured
Principal
Interest Noted
Uninsurable risk (speculative and
non-speculative))
25
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

26
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.

27
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.

28
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

29
Example of checking procedure
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GUIDELINES FOR DETERMINING APPROPRIATE LEVELS OF
INSURANCE FOR GOODS AND SERVICES CONTRACTS
32
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
36
Information Technology
37
Information Technology
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Information Technology
39
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
40
Information Technology
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Information Technology
42
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
43
Bacterial Culture Transportation
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Bacterial Culture Transportation
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Bacterial Culture Transportation
46
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
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