Most liability policies contain some form of contractual liability exclusion. This commonly in terms that the insurer will not be liable of any loss assumed by the insured under a contract or agreement, save to the extent such liability would have attached to the insured in the absence of such contract or agreement (under the common law or a statute, for instance).
One area where insureds might assume an increased liability is by giving a contractual indemnity. Indemnities can alter the common law position in a number of ways. For example, they can extend limitation periods. Using a property damage claim as an example, the limitation period would ordinarily run from the date of damage. However, if the insured has given the plaintiff a contractual indemnity against property damage, the limitation period may not begin to run until the plaintiff has called on the indemnity and the insured has failed to honour it. It is not hard to see how this could greatly increase the limitation period causing the insured to become liable for a claim that otherwise would have been barred by the relevant limitation statute. A standard contractual liability exclusion would then operate to protect the insurer in this situation.
Depending on their wording, contractual indemnities may also remove the ability for the insured to run arguments of contributory negligence against the plaintiff, or the insured may be required to pay the plaintiff’s legal costs on a full indemnity basis when awards of indemnity costs by Courts are rare. Again, the contractual liability exclusion would protect the insurer from being required to cover the full amount of the plaintiff’s claim in these situations.
Another potential minefield for insureds is contracting out of proportionate liability legislation (expressly permitted in WA, NSW and Tasmania). Where there are several parties who are responsible for a loss caused by a failure of those parties to take reasonable care, liability will ordinarily be apportioned between the parties according to their individual responsibility for the loss. The plaintiff bears the risk if one of the defendant parties is insolvent or uninsured and cannot pay its share. If the insured contracts out of proportionate liability legislation, the position is reversed. The insured is 100% responsible to the plaintiff and must seek contribution from the other parties. It is the insured which bears the risk if one of those parties is insolvent or uninsured. Again, the contractual liability exclusion may be relied upon by the insurer to reduce the amount due to the insured because the insured has assumed a greater liability under its contract.
Insurers and insureds therefore both need to be mindful of the potential far reach of contractual liability exclusions. Insureds need to take care when entering into contractual arrangements so as not to inadvertently reduce their insurance cover (or negotiate revised wordings). Insurers need to give careful thought as to whether their position has potentially been prejudiced on a claim by a contractual term to which the insured has agreed.
This article was written by Keith Thomas, Partner.
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