Proportionate liability

From
Charmian Holmes

Charmian Holmes

Businesses (and their insurance brokers) waiting with bated breath for new model proportionate liability laws may be sorely disappointed.

The basic principle of proportionate liability is that it enables responsibility for a damages claim to be allocated according to the degree to which each wrongdoer’s actions contributed to the loss.

Proportionate liability legislation was seen as the solution to spiralling premiums for liability insurance. While this might be working for insurers, small businesses remain exposed and the model laws will not provide a universal panacea.

No ‘Contracting Out’ for Lower Value Contracts

A single model law which bans contracting out of proportionate liability could reduce the likelihood of bigger businesses transferring risk to smaller business.

Contracting out of proportionate liability has been a problem area because it usually improves a principal’s legal position but means the other (smaller) party carries more contract risk (including liability for the principal’s negligence).

Parties are deemed to have contracted out, if the indemnity clauses in the contract do not allow liability of each party to be apportioned according to fault.

Currently if the governing law of the contract is:

  • NSW, WA and Tasmania, you can agree to contract out.
  • SA, ACT, NT, Victoria and the Commonwealth, the position is uncertain.
  • QLD, it is unlawful to contract out.

The proposed model laws will at least provide consistency across Australia by prohibitingcontracting out for contracts with a value of either $10m or $5m (the exact amount hasn’t been decided yet). A significant benefit for small business!

Indemnities will still be allowed

Larger businesses have been concerned that proportionate liability laws interfere with the operation of contractual indemnities. For example, where one wrongdoer agrees to indemnify another wrongdoer for their proportionate share of a third party damages claim.

Currently:

It is unlawful to seek contribution or indemnity from a concurrent wrongdoer in NSW, ACT, QLD, VIC, and the Commonwealth.
It is permitted in NT, Tasmania, WA and SA.
The model laws will allow contribution and indemnities between wrongdoers and this is particularly disappointing for smaller businesses.

Allowing this, makes the ban on contracting out of proportionate liability meaningless because in most cases, it will be the smaller party that will have to bear all the liability.

If they agree to this, it will invalidate their insurance because their contractual liability will differ from their proportionate liability.
If they don’t agree, they risk losing the business.
It’s common knowledge that assuming liability under a contract which differs from the insured’s common law liability will trigger the contractual liability exclusion in PI and public liability policies, leaving the policyholder unprotected.

This exposure can be minimised by obtaining good quality cover for principal’s liability within a public liability policy. Unfortunately there is no way of doing this for PI insurance because principal’s liability cover is not available for that type of insurance.

Arbitration and Binding Determinations Exempt

Another surprising development is that proportionate liability will not apply to alternative dispute resolution unless the parties expressly agree in the contract.

Who knows why this is considered a good idea! But from now on, if you want alternative dispute resolution processes like mediation or arbitration to apportion liability, ensure you stipulate this in the contract.

For those whose actions could be judged by an external dispute resolution body like the Financial Ombudsman Service, it seems extremely unfair that a dispute could be dealt with differently to court proceedings – especially when one party is legally required to submit client disputes to that body and has no influence over its terms of reference.

When will the changes commence?

It is not clear when the model laws will start. We predict that it will be a long process, as each state and territory will have to amend their laws to align with the proposed model.

What is clear though, is that contracting parties will still need legal advice on how the contracts they sign interact with their insurance program – including indemnities, insurance obligations, warranties, guarantees, performance obligations and dispute resolution clauses.

There isn’t always a quick fix to the issues of contract risk allocation, but understanding where the exposures lie and what is covered by insurance, will help you and your clients to make an informed assessment.

The Fold’s Contract Review Services helps insurance brokers and their clients to identify areas of contractual liability and exposures that may not be covered by their insurance program. Get in touch for personalised advice.

By Charmian Holmes www.thefold.com.au

You must be logged in to post or view comments.