Why is contract review important for insurance?
Proposals for public and products liability insurance often ask whether the potential insured has assumed any obligations under contracts or agreements, including through hold harmless or indemnification agreements.
Unfortunately, all too many times people have indemnities or hold harmless agreements in their existing contracts and may be completely unaware. This, in turn, can expose you and your business to unintended risks or gaps in your insurance solution.
At Acacia Insurance, we’re able to review contracts and advise our clients on the insurance ramifications. This is a point of difference that we pride ourselves on, and the service has helped many of our clients reduce their risk exposures. Contact us to find out more or read on to learn more about this risk.
What are hold harmless and indemnity clauses?
Indemnity and hold harmless clauses are very similar. They involve a party to a contract agreeing to indemnify (hold harmless) the other party to the contract for any liability of that other party. The severity of these clauses varies quite considerably, with some imposing liability irrespective of fault.
You need to be careful when answering the question posed by insurers about assumption of liabilities because even if you don’t sign standalone agreements called “Indemnity Agreements” or “Hold Harmless Agreements”, it is commonplace for more general contracts or agreements to contain such clauses.
Other clauses
In addition, other terms or conditions of a contract or agreement might increase your potential liability. For example, do you assume additional liabilities if you agree to a standard of service or product (e.g. best practice) that exceeds the level ordinarily expected?
Similarly, do you increase your liability by releasing a party to a contract from any liability or agreeing to contract out of a proportionate liability regime? Such clauses potentially increase your exposure by foregoing recoveries from a third party.
Consequences
The existence of a contract including an indemnity is likely to be a material fact relevant to an insurer’s decision whether or not to underwrite a particular risk and therefore should be disclosed.[1] The same might be said about contracts that include other terms that increase your liability beyond that imposed by ordinary terms.
A failure to disclose contracts containing such terms may, therefore, entitle an insurer to decline a claim or avoid the policy altogether.
In addition, indemnity or hold harmless clauses or other terms and conditions that increase your liabilities may fall foul of contractual liability exclusions inevitably included in public and products liability policies. Again, these clauses vary from policy to policy and there may be avenues by which the exclusion can be overcome (e.g. by having the contract specifically designated).
Our role
As part of our role as your insurance adviser, we often review major contracts entered into by our clients and advise whether any might increase their potential liability and, if so, the insurance consequences and the actions that should be taken. This might include suggesting our clients seek to have clauses excluded or seeking to have the contract specifically designated by an insurer.
Questions about a contract review?
If you want to talk about an insurance contract review or discuss your insurance solution, don’t hesitate to contact us.
The information in this article is general only, it doesn’t take into account your business or situation. You should speak to your insurance adviser or insurance broker about your needs before making any changes or decision. As insurance advisers, we are not authorised to and unable to provide you with legal advice and this article does not purport to do so. We recommend you seek independent legal advice on any matters in this article that might concern legal matters.
[1] This was the position taken in QBE Underwriting as managing agent for Lloyds Syndicate 386 v Southern Colliery Maintenance Pty Ltd [2018] NSWCA 55.