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23 June 2016Contract Risk Management - An Insurance Perspective

Contract Risk Management - An Insurance Perspective

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When you agree to undertake work, you (not your Insurers) will be forming a contract with your counterparty (e.g. employer) as defined by the terms of your appointment.

Insurance cover may vary across the insurance market according to industry views and experiences from year to year, but no insurance policy will cover every eventuality arising under a contract. As such there may be areas of exposure for which you are not covered by insurance.

In these instances where Insurers will not provide an indemnity then it is important to remember that:

  • You are still liable under contract
  • The employer can claim against you for any losses for which you are liable under contract
  • The consequences are potentially severe and could lead to bankruptcy of the business if the claim is substantial enough
  • There is the possibility of personal liability on directors depending on the terms of the contract

Contract terms – the key issues to be aware of

Liability policies will generally require the existence of a legal liability and most policies will deal with contractual liability to some extent.

A contract can impose a higher duty of care or liability than would otherwise apply and extend the period for which you may be liable. You must be alert to the risk of accepting contractual liability where there would otherwise be none and with parties to whom you would otherwise owe no duty of care.

Some of the particular issues to be aware of are:

Fitness for purpose clauses / express guarantees - These can arise in appointment agreements and collateral warranties and represent onerous, absolute obligations that impose a duty beyond the ordinary standard of reasonable skill and care in the performance of your services.

Indemnity clauses - The intention of indemnity clauses is to make you liable to hold harmless or indemnify your client in respect of “all losses, claims, damages, expenses and costs” that are caused by a particular breach of contract or duty on the part of the consultant.

Liquidated damages - Penalties = a sum which is not a genuine pre-estimate of loss and are therefore unenforceable. Liquidated damages clauses less likely to be penal and more likely enforceable.

The steps you can take

  • Have a good risk management strategy
  • Ensure you read and understand the contracts that you sign
  • Good connection between legal/risk and business
  • Know what clauses are being used and whether they are/are not insured
  • Seek specific extensions where required
  • Look to fill gaps where matters are not insured (e.g. by contractual means)
  • Good audit process to manage the time lag between projects and claims, particularly where policies are “claims made”

To discuss how we can help you with Contract Risk management please contact us.

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