Most contracts contain indemnity clauses that require one party to indemnify the other if things go wrong. Where there’s an imbalance of negotiating power, these clauses are often quite unfair to the weaker party. And this can affect your ability to access your liability insurance to cover the claim.
Most public and product liability insurance and professional indemnity policies exclude legal liabilities that are assumed under a contract if they are more onerous than the liability you would have had in the absence of the contract.
Two solutions
The first solution is to negotiate a change to the contract to align the indemnity with your legal liability – but this is not always possible.
So what do you do if you can’t get the changes you want and you really need the contract? Ask your broker to request your insurer to “designate” or “note” the contract on your public and products liability insurance policy schedule.
Getting a contract designated
In some policies, the contractual liability exclusion clause contains an option whereby the insurer will “write-back” some cover for liability assumed under a contract. Your broker will need to provide a copy of the contract to the insurer and the insurer will need to agree.
Even if the policy doesn’t contain a write-back option, you can still ask the insurer to endorse the policy by designating the contract.
Insurers aren’t obliged to designate a contract. They often refuse to do so if the indemnity clauses are unreasonable, i.e. impose obligations which far exceed your liability at law. That’s why you should always try to negotiate changes to the indemnity clause to align it with proportionate liability principles first, and only approach the insurer as a last resort.
What to look out for
Firstly, the endorsement must be carefully drafted to ensure the contractual liability exclusion can’t operate in relation to the contract.
Ensure the policy schedule is updated to show the designated contract – and that this occurs every year that the contract remains on foot. This can be easily overlooked if you change insurers.
Designating a contract is not foolproof. The other policy terms and conditions in your insurance still apply, so if the policy would not have covered the contractual obligation in the first place, the designation will not overcome that.
When is the insurer likely to designate?
Good drafting changes to the contract should ensure that liability is apportioned fairly between the parties, relative to their responsibility for the loss. If an insurer believes that the indemnity clause is even-handed and they do not need to assume too much risk for your contract, they are more likely to agree to provide contractual liability support for the contract by designating it on the policy. If there is an exclusion for consequential loss or a restriction on how much the other party can recover from you, this might also persuade the insurer to designate the contract.
Legal advice on the correlation between the contract and the insurance policy can help to persuade the insurer to designate the contract.
The Fold’s Contract Review Service assesses your contractual exposures in the context of your insurance program and works with your broker to get the contract designated.
By Lydia Carstensen
