insurance clauses in contracts

David KentSnr Consultant

Marsh Risk Consulting

Insurance Clauses in Contracts

Marsh

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

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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?

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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.

Marsh

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.

Marsh

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)

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EXAMPLE - INSURANCE CLAUSE

Example clauses only. Incomplete and not to be relied upon.

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

David F. KentClient Service Executive

Understanding Insurance Covers

Marsh

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

Marsh

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.

Marsh

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

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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

Marsh


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.

Marsh


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.

Marsh

Motor Vehicle

Compulsory Third Party (CTP)

– Coverage for injury to 3rd parties

– Evidence of the Contractor’s 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

Marsh

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.

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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 insured’s past operations.

Marsh

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

Marsh

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 P&I coverage of Marine policies

David F. KentClient Service Executive

Insurance Certificates and Documentation

Marsh

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.

Marsh

Insurance Certificates

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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.

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Hierarchy of Insurance Conditions

Princip

al Additional I

nsure

d

Inte

rest

Note

d

Uninsurable risk (speculative and non-speculative))

Insurable Risk

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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

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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.

Marsh

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.

Marsh

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”

Marsh

Contract Conditions

• Indemnity Clause

• Insurance Clause

Contractor Supplies proof of insurance:

eg Confirmation of Cover /

Certificate of Currency

Insurance meets contract requirements

• Name of Insured

• Class of Insurance

• Limit of Insurance

Insurance provider is acceptable

• APRA Listed

• S&P rating minimum B_

File and log compliance in accordancewith contract management procedure

Contractor

No

No

No

Yes

Yes

Yes

Corrective Action Loop

Example of checking procedure

GUIDELINES FOR DETERMINING APPROPRIATE LEVELS OF INSURANCE FOR GOODS AND SERVICES CONTRACTS

Marsh

Risk Management Process

ESTABLISH THE CONTEXT C O M M U N I C A T E & C O N S U L T

ANALYSE RISKS

M O N I T O R & R E V I E W

EVALUATE RISKS

No

TREAT RISKS

Source: AS/NZS 4360:2004

IDENTIFY RISKS

Compare against criteria Set priorities

Treat Risks

Yes

Marsh

Worksheet 1

Initial Risk Assessment and Identification of Appropriate Levels of Insurance.

Prepare Documentation and Run Tender

Prior to running the tender it is necessary to assess the level of risks involved in running the contract. Use Worksheet 2 to help with this. Risks have been rated into five categories – extreme, high, significant, moderate and low – depending on the combined ratings of likelihood and consequence. Use the colour coding to help identify the minimum level of insurances required.

Step One Use Worksheet 1 to help assess the level of risks and levels of insurance required.

Assess Tender Responses Finalise, abandon or seek other alternatives.

Step Two Prepare documentation and run tender

Insurance must be in place before the commencement of the contract.

It is advisable to include the following conditions in the contract: A requirement to

advise of cancellation/lapsing of insurance cover.

That proof of insurance be provided at the signing of the contract and 60 days prior to renewal of the policy.

For other conditions refer to the Standard Request for Tender document.

Step Three Assess the tender responses and if necessary, re-evaluate the risks

Insurance requirements have not been met. A lower level of insurance may be appropriate if the contractor has effective controls in place and the risk assessment has been re-evaluated.

Step Three B Use Worksheet 2 to re-evaluate the level of risks involved after taking into account risk mitigating factors such as the controls listed above. Identify the level of insurance for the residual risks.

Step Three A Assess the initiatives that will reduce risk exposures.

Public Liability $

Professional Indemnity $

Check List

□Proof of insurance has been obtained

□Period of cover is adequate

□Contracted activity is covered

□The consultant’s professional indemnity cover has a run-off period of 6 years after the completion date.

□There are no special arrangements that preclude the Crown. If in doubt, seek Crown Law advice.

Step Four Accept the tender, perhaps with lower insurance levels & associated risks or abandon

Insurance requirements have been met.

Control Check List (examples might include the following) Does, has or is the contractor:

accredited

provided a safety plan

committed to quality assurance at a level, which reflects the nature of risks, associated with the project

financially viable and not committed to multiple projects at the same time

closely co-ordinate sub-contractors.

Accept the tender and check the following:

If insurance matches the re-evaluated requirement – accept the tender and check the following.

If the level of insurance does not match this, abandon or negotiate an alternative delivery mechanism.

Insurance requirements – Initial Assessment

Insurance Requirements – Re-evaluated

Public Liability $


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Worksheet 2 - Initial Risk Assessment

Consequences Likelihood

Insignificant/Negligible Public Liability risks □No injury □Minor injury or damage that may or may not result in a formal complaint being lodged. □Minimal impact on business. Professional Indemnity risks □Minimal impact on business □Negligible circumstance resulting in no financial loss.

Minor Public Liability risks □Minor injury □Damage to property that could be managed within existing unit/Department budget. □Interruption of service delivery affecting non-key operations. Professional Indemnity risks □Interruption of service delivery with little financial loss to 3rd party. □Moderate financial loss or additional expenditure (including legal costs) that could be managed within existing unit/Department budget.

Moderate Public Liability risks □Injury or illness resulting in hospitalisation (medical expenses) □Damage to property that can be managed within the Department’s budget. □Interruption of service delivery affecting multiple units/branches Professional Indemnity risks □Interruption of service delivery with major financial loss to 3rd party. □Major financial loss that can be managed within the Department’s budget.

Major Public Liability risks □Permanent/serious injury to persons □Damage to property that cannot be managed within the Department’s budget. □Interruption of service delivery to multiple users and/or back-up failure

Professional Indemnity risks □Business interruption with major financial loss to multiple users. □Financial loss that cannot be managed by the agency.

Catastrophic Public Liability risks Fatality or multiple fatalities Chance of multiple claims Major incident requiring organisation-wide evacuation of site. Significant damage to property Critical financial loss Complete loss of service Professional Indemnity risks Critical financial loss that has significant impact

Almost Certain □ Moderate □ Significant □High □Extreme □Extreme Likely □ Moderate □ Significant □High □High □Extreme Moderate □ Low □ Moderate □Significant □High □High Unlikely □ Low □ Low □Moderate □Significant □Significant Rare □ Low □ Low □Moderate □Significant □Significant

Identification of Appropriate Insurance Levels

Insurance Level Public Liability

□Low $0 - $1 million

□Moderate $1 - $5 million

□Significant $5 - $10 million

□High $10 - $20 million

□Extreme Greater than $20 million

Insurance Level Professional Indemnity

□Low $0 - $.5 million

□Moderate $.5 - $1 million




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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

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Information TechnologyWorksheet 1
















Public Liability $


Check List









accredited










Public Liability $


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Information Technology























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Public Liability N/A

Professional Indemnity $5,000,000

Check List









accredited










Public Liability $


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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

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Information Technology























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Public Liability N/A


Check List









accredited










Public Liability $NA


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Scenario – Bacterial Culture Transportation

Contract Requirements Manufacture of commercial fish vaccine from bacteria supplied by the Crown

Outputs Material transfer agreement


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 IndemnityFactors History of success with vaccine production

HACCP accreditation

Financial strengthResidual Risk - Insurance

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Bacterial Culture TransportationWorksheet 1
















Public Liability $20,000,000


Check List









accredited










Public Liability $


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Bacterial Culture Transportation























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Bacterial Culture TransportationWorksheet 1


















Check List









accredited












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Scenario – Roadside Maintenance

Contract Requirements Maintenance in and around visitor centre at Hastings Cave

Outputs Mowing, whipper snipper of grass


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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Worksheet 1
















Public Liability $


Check List









accredited










Public Liability $


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Questions

insurance clauses in contracts

Documents

insurance clausesexamples

specified insurance

department of x x x

property damage andor

legal liability

extent of liability

state of tasmania

omissions of tasty treats