This article is about liability, sometimes “called” indemnity, how to reduce it, why it is required and how do you work out what yours is? It’s a long one yet winning contracts with unclear liabilities can lead you to long unfulfilling journey.

Welcome back, or if you’re new here sign up to our RSS feed to receive insurance tips, new posts, plus details of events and promotions that could help you or your network reduce the risks facing their organisation.

I’ve just won a contract!

We are called every week by people who make the above exclamation. It’s great when client win new contracts, they get so excited when they start working with one of the ‘big boys’. However these contracts are often weighted towards the bigger company in the “partnership” and have severely onerous terms and conditions. It will never cease to amaze me how many people sign a legal document without reading it, having a expert interpret it for them or seeking any form of legal advice. However it happens every week, I’ve even done it myself when there’s little at stake. Lesson learned! We now know enough solicitors to advise clients when the need arises. Solicitors have different specialisms and expertise and we try to help, or at least signpost, all the enquirers we hear from.

One of the most important contractual areas to negotiate upon is the level of liability you are being asked to carry. Many contracts have “boiler plate” wordings which have ridiculously high levels of insurance protection demanded from small companies as well as medium and large. The first point to negotiate on is the amount of protection they expect you have in place. This is because insurers will, typically, charge a rate for every £100 or every £1000 of cover that you require. A higher level of protection means an increased insurance investment, which might not match the new risks.

Demands for insurance documents

A lot of contracts state that “you must have insurance a, b or c”. Many business owners start looking as soon they read this, not realising that further on the contract will stipulate that the full insurance documentation must also be provided. So they contact an insurance provider and arrange cover quickly without checking how long the documents will take to arrive. You will think insurance providers can issue documentation very quickly. This is not the case, some of them have several levels of check on their policy documentation before they are issued. Others prepare the documents in one country and issue them from another. Some only issue documentation online. Others seem like they’re still using pigeons that carried messages during WWII.

This doesn’t help when the people fulfilling the contract require payment. If a contract says you must have insurance a,b or c and documentation, you are unlikely to be paid until you have provided documentation. This has caught out people who either didn’t bother arranging insurance at the outset, yet told their client they had, or they arranged insurance with a provider that could not issue documentation promptly.

Businesses are not likely to go bust because they failed to arrange insurance. But not all insurance can be paid in monthly instalments, so cash flow needs to be managed.

How do I work out my liability?

The “boiler plate” contracts mentioned above have high limits because it is often difficult to estimate. Sometimes the actual amount of liability can only be determined following litigation because claims become so complicated. Not all contracts ask for annual insurance. Some I have seen have insisted that insurance is arranged and then maintained for 12 years after the project was completed. This protected the large company against issues that arose later in the day. It is a contractual requirement and there is not much use accepting a contract for £144k income, if the insurance premium is £12k and you are required to keep it in force for 12 years. Some companies have accepted these terms because they were so confident that they would continue to get business from the company they just started to work with. Not all businesses survive taking this type of risk.

We have developed a method that helps us understand the liability businesses are asked about and they, with the help of their legal team, negotiate what they can reasonably reduce it to. As a business owner, I like to have advisers who can answer unusual questions when the need arises. It reduces my liability when they help with the things I know that I don’t know.

Wrap up: Winning contacts is great as long as you understand the liabilities that they bring into your World. Don’t sign anything until you have read everything, I know that it isn’t easy. Ask for help with interpretation of things you don’t really get and ensure you understand exactly what you are getting into by signing on the dotted line.

Top Tip

It’s very rare that people make mistakes when delivering contracts. The most common issues are when people allege something has gone wrong, hide a mistake, fails to own up to their own error or vindictively blame people they have fallen out with. The blame culture isn’t a new phenomenon, yet it is here to stay.