Insurance policies usually exclude cover for "assumed liability", being liability that is greater than the law would overwise impose. Many professional services contracts now include clauses that increase a Contractor's liability and leave them at risk for an uninsured portion of claims. It is important for both parties to understand what potential claims are not covered by a Contractor's insurance before signing the contract.
1. Indemnity
Industry standard services contracts provide for general liability where the Contractor breaches the contract for "reasonably foreseeable claims", including any liability of the Principal to a third party. However, an indemnity clause will further extend liability to loss or damage which does not usually flow from a breach of contract, or which was not contemplated by the parties at the time the contract was entered (loss that is not reasonably foreseeable). Unless there is drafting in the contract to provide for it elsewhere the Principal can often argue that they also don’t have to take steps to mitigate their loss.
2. Extending the reasonable duty of care
Most insurance policies will only cover the insured in the event that they have failed to exercise reasonable skill and care (ie committed professional negligence). Some services contracts can extend the common law duty of care by incorporating phrases that require the Contractor to use their "best endeavours", the "highest duty of care" or "utmost skill and care".
3. Fitness for purpose clause
The inclusion of a clause requiring the Contractor to ensure their services are fit for their intended purpose usually extends the reasonable standard of care required by common law. The clause imposes a professional duty on the Contractor to "be right" as opposed to requiring them to "be careful". It can sometimes be viewed as a guarantee which is often excluded by insurance policies.
4. Cover for personal injury actions
A contractual clause that requires the Contractor to indemnify the Principal's liability for loss and damage arising out of personal injury falls foul of the Health and Safety at Work Act 2015 (Act). For the Contractor, the Act provides that a person must not indemnify, or offer to indemnify, another person for the other person's liability to pay a fine or an infringement fee under the Act. For the Principal, the Act provides that a person must not be indemnified, or agree to be indemnified, by another person for that person's liability. It is an offence which can result in a fine of up to NZ$50,000 for an individual and NZ$250,000 for an organisation.
5. Indemnity costs
The inclusion of an agreement by a Contractor to pay indemnity costs will increase their common law liability and take them outside of cover as usually legal costs are awarded to a successful claimant on a scale basis.
6. Duration of liability
There is a six year timeframe for bringing a breach of contract claim at civil law which is often reflected in standard contractual drafting. Deleting limitation clauses can cause problems for insurance cover. Limitation periods are not a black and white area and there is developing law in relation to contribution claims between parties. These claims were previously seen as subject to a ten year long stop under section 393(2) of the Building Act 2004. In late 2022 (in Beca Carter Hollings and Ferner Limited v Wellington City Council) the Court of Appeal confirmed that contribution claims are governed solely by section 34 of the Limitation Act 2010, which allows a defendant two years from the date on which its own liability is established to bring a contribution claim. In that instance a claim could be bought by the Principal well after ten years from the Contractor's involvement.
Mitigate and manage the risk before you sign!
Insurability and liability are separate matters; it is a question of how much risk a business can voluntarily take on and the impact that risk might have on long term business sustainability.
For a Principal, it is important to understand what part of any potential claim may in fact be uninsured by a Contractor under the terms offered. Ask yourself: Can the Contractor self insure for the risk?
Before assuming risk that is outside of insurance cover a Contractor should consider:
- What risks does the proposed clause cover?
- What events could trigger the clause and how likely are they to occur?
- Are you in control of the risks or do they lie outside of your control?
- If the risks are partly or entirely outside of your control, does any other third party assume that risk?
- Is that third party providing an equivalent indemnity to the Principal?
- What are the potential losses that could arise under the clause and can you self insure?
Entering into a professional services agreement requires more than just signing on the dotted line. Buddle Findlay is experienced in addressing these insurance issues through discussion with brokers and insurers and by drafting the relevant clauses. Early review by our insurance lawyers can assist you to identify and then mitigate and manage potential risks.
For more information, please contact Susan Rowe or a member of our litigation and dispute resolution team.
