Contractual Insurance Obligations

Contractual obligations to arrange insurance imposed upon consultants often call for policy features that are not readily available. These can include obligations requiring the benefit of the consultant’s insurance policies to extend to other parties; this could be in the form of naming these parties as Insureds or by requiring the policy to ‘cover’ them. Onerous contractual obligations of this type sometimes confuse the scope of cover and operation of professional indemnity insurance versus public and products liability insurance.

To understand the extent to which client-drafted insurance requirements can be satisfied, we should first consider how each type of policy operates, because professional indemnity and public and products liability policies are vastly different in both scope of cover and operation.

Public and products liability insurance provides you with funds to pay compensation to a third party for injury or damage arising from your business activities. However, public and products liability insurance policies often have exclusions in relation to claims arising from the provision of professional services. This type of policy is triggered by the originating cause of the legal liability, namely personal injury or property damage.

For professional consulting firms, products may be limited to tangible elements of reports, stationery, gifts or promotional material provided to clients. Public and products liability policies often require the occurrence (injury or damage giving rise to a legal liability) to happen during the policy period and there is no particular requirement for the insured to notify the insurer immediately that they become aware of the matter.

Professional indemnity insurance covers claims for a breach of professional duty. Under this policy type the originating causes or claims types are not defined but in practice can be personal injury, property damage or financial loss. The trigger for this type of policy is the actual or alleged breach of professional duty.

While it may seem that there is overlap between what is covered by each type of policy, insurers address this with exclusions:

• Public and products liability policies typically contain exclusions in relation to liability arising from a breach of professional duty.
• Professional indemnity policies typically contain exclusions in relation to personal injury or property damage unless arising out of a breach of professional duty.

While we come across many weird and wonderfully onerous contractual insurance requirements, some of the most common types we see include:

Naming a principal as an Insured, an additional insured or as a co-insured

Naming principals outright as Insureds is rare under both public liability and professional indemnity policies; however, some public liability insurers will note a principal as an Insured to the extent that the principal is covered for vicarious liability arising out of the Insured’s conduct.

Professional indemnity insurers/policies will rarely provide this type of extension, and in many instances naming a principal in such a manner would prevent the policy from responding to a claim by that principal.

Covering a principal

Public liability policies often contain claims that cover principals for their vicarious liability, and so this requirement is often easily satisfied by off-the-shelf public liability policies – provided that the contractual requirement is qualified by only requiring cover for vicarious liability rather than cover for the principal independent of the Insured’s conduct. Note the important difference between ‘covering’ and ‘naming’ a principal, as discussed above.

Deeming the consultant’s client to be a principal

While we sometimes come across this requirement (unless the policy contains clauses that reference or define the term ‘principal’), it seems a nonsensical requirement that is unlikely to provide any benefit under a public liability or professional indemnity policy.

Covering sub-consultants

It is unusual for either public liability or professional indemnity policies to cover sub-consultants; however, it is common for both classes of policy to cover the Insured Consultant’s vicarious liability arising from the conduct of such sub-consultants.

Interested party

These clauses typically require the principal or another party to be noted as an interested party. It is common for public liability policies to note a consultant’s principal as an insured party; however:

• the benefit of this is usually limited to the extent that the policy provides cover to the principal for vicarious liability arising out of the consultant’s conduct
• the vicarious liability cover provided to principals is often an automatic extension under public liability policies, and in such instances naming the principal may not provide an additional benefit
• consultants should consider the administrative burden of having their insurer note various parties on their policy if they are to entertain these requirements, as opposed to pushing back and negotiating amendments to such clauses.

Covering interested parties is not common in professional indemnity policies, although a small number of policies contain clauses that include a principal as an interested party. Even if your policy contains a clause of this type, careful attention should be paid to ensure the policy clauses satisfy the intent of the contract requirement.

Cross liability

A cross liability clause obliges the insurer to cover each of the insured parties as if they had taken out insurance separately. These types of clauses are practical in construction contracts when a principal or contractor arranges a policy that covers both principal and contractor. Many public liability policies contain cross liability clauses and so would satisfy a simple requirement to have a clause of this type. However, it is important to ensure that there are not any particular attributes that the contract requires the policy to include as these may not be satisfied.

These types of clauses are not common (and in many instances would be nonsensical) in professional indemnity policies.

Waiver of subrogation

These clauses prejudice an insurer’s right to recover against the principal or another party and are common in public liability policies.

Contract requirements sometimes call for the mere existence of a clause of this type whereas others specify the parties, usually including the principal that the benefit of the clause must extend to.

This type of clause is common in public liability policies but the benefit of the clause is often limited to the extent to which parties are covered by the policy. It is not common for professional indemnity insurers to waive rights of subrogation.

If consultants assume contractual obligations to arrange insurance that are not satisfied, they may find themselves in breach of the contract. While the above are common and typical examples, there are many variations of these types of clauses. Consultants should carefully review their contractual insurance obligations to ensure they are realistically satisfiable by their insurance program.

A specialist broker can advise you on the extent to which you are able to satisfy your contractual insurance obligations and assist in negotiating required amendments to contracts and/or your insurance program.

The information provided here is general advice only and has been prepared without considering your objectives, financial situation, or needs. If you would like specific advice, please call 03 9059 4000 to speak to one of our specialist consultants.