In our recent updates, we talked about liability for a breach of contract. You may recall that, in the absence of a contractual limitation of liability, such liability is basically unlimited (subject to some restraints under common law – causation, remoteness and mitigation). Further, a contractual indemnity usually removes these common law restraints and therefore results in completely unlimited liability. People commonly believe that insurance offers an answer to liability under common law and indemnities. But does it?
A few key things to remember about insurance:
- Insurance covers loss/damage arising from specific events in specific circumstances. For example, a public liability insurance policy covers liability for damage to property and personal injury. On the other hand, under common law or indemnity, a party can be liable for much more than property and personal injury, for example, for losses of profit or revenue. Further, any insurance has a limit (for example, $10,000,000 per occurrence is common in a public liability policy), while liability under common law or indemnity does not have any limit (in the absence of a contractual limitation of liability).
- Insurance policies are complex documents with many conditions and exceptions. It is not uncommon for an insurer to refuse coverage based on technicalities such as a non-compliance with the disclosure requirements. On the other hand, there is no such protection available to a party that is liable under common law or an indemnity.
- Under insurance policies, an insured party is usually responsible for a portion of any loss. This is called an excess or deductible. Therefore, even if your liability is covered by insurance, you are still paying a portion of it. Furthermore, your claims history will have an impact on future premiums paid by you for your insurance policies – that way insurers will claw back some of the money they had to outlay to cover your claim.
- It is not uncommon for insurance policies to exclude liability assumed under a contract which goes beyond common law liability. This will easily capture liability under an indemnity because such liability almost invariably goes beyond common law. Therefore, you may find that if you are liable under an indemnity in a situation where you would not have been liable under common law, an insurer may be able to refuse to cover it.
Therefore, insurance is certainly not a complete answer to liability under common law or indemnities. It is, at best, part of the answer together with ensuring that indemnity clauses in your contracts are reasonable and that your contracts contain robust limitation of liability provisions (refer to our last update on limitations of liability).
For more information or for assistance in preparing, reviewing and negotiating any contracts, please contact Stanislav Roth at Source Legal, email firstname.lastname@example.org.
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