It is a given that almost every business will inadvertently sign contracts and agreements as part of their business and the way a Public and Products Liability policy treats them depends on what type of contract they are.
To start with, it is safe to assume that just about any contractual obligation you voluntarily agree to bear, will be excluded from your Public and Products Liability cover. However, there are some exceptions.
If you have a good quality policy (such as those available through a Steadfast broker) then any “Incidental Contract” you sign such as tenancy agreements, hire agreements or contracts relating to the supply of electricity, gas, water etc. is partly exempt^. This is likely because these are largely accepted as being standard contracts that are by and large unavoidable for businesses.
Any obligation that extends your liability beyond what would have been in the absence of the contract or agreement (such as government tenders, contracts for the supply of goods or services or privately arranged contracts between your customers or suppliers) is excluded from your Public and Products Liability cover.
Contractual Liability Example: XYZ Electrical is an electrical contracting business and is asked to assist in the fit-out of a new supermarket by the head contractor, lets call them ABC Contracting. XYZ Electrical agrees to the work and is provided with a contract from ABC Contracting that outlines the parameters of the job and the obligations each party have to one another as part of the contract.
XYZ Electrical is excited to have won the work, signs the contract and doesn’t give much thought to the contents of the contract because “nothing’ll go wrong, its pretty straight forward work”.
Whilst on site the electrician causes a total black out onsite due to causing significant damage to the electrical sub-station that powers the supermarket and surrounding businesses.
The entire job is interrupted as well as other businesses in the vicinity who were without power for the day. Other trades are sent home unable to complete their work without power. The damage the electrician causes is classed as “damage to third party property” and barring any unforeseen circumstances, the damaged sub-station and the liabilities to the surrounding businesses is covered under their Liability cover.
A few weeks after the incident they receive a letter from a legal firm representing ABC Contracting. It outlines that as per the contract, XYZ Electrical is also liable for $19,543 in liquidated damages calculated in accordance with the contract. Assuming this is yet another bill their liability insurer would be paying for they simply submit it to the insurer, only to find that the liquidated damages is a clause that extended their liability beyond what would have been in the absence of the agreement. As a result these liquidated damages are not insured and are left for XYZ Electrical to bear themselves.
Liquidated damages are only one type of liability that can be incurred via contract, with other common clauses being hold harmless agreements, waiver of subrogation clauses, proportionate liability for unrelated site costs among others. It is a trap to assume these types of liabilities are simply covered by a Public and Products Liability policy, and even naming the contract on your policy specifically may not alleviate the impact of these clauses.
There are a few different ways a business can deal with these types of obligations, but it requires expertise in the liability market. For more information or to discuss your situation, please contact MMSE.
^An “Incidental Contract” will be defined in the policy wording and although tenancy and hire agreements can be exempt, certain obligations such as the need to insure someone’s property isn’t. You should contact us for specific advice and guidance before making any decisions relating to contractual liabilities.