Insurance does not limit your liability

Do you believe that if you insure your liabilities, the level of your insurance cover acts as a limit on your liability?

It doesn’t.

This is the most common misconception among business owners when I am delivering workshops on contracts. My objective is to help both sides protect their interests and create sustainable business relationships. That means combining insurance, limits on liability and providing great service.

No legal link

At its simplest we need to consider two distinct contracts:

  1. Your contract with your insurer: this limits the insurer’s liability – in the event of a claim – to the amount of your cover, subject to specific conditions and any excess.
  2. Your contracts with your clients or contractors: this will not limit your liability unless there is an express clause to that effect.

Any limit on liability is independent of the level of your insurance cover.

You can have insurance without limiting your liability and you can limit your liability without having insurance. If you don’t have insurance it is definitely in your interests to limit your liability and prevent a massive claim making your company insolvent.

If you have insurance, it does not limit your liability – insurance acts as an asset against which claims can be made, but doesn’t stop the claim being greater than your insurance cover or below your excess level.

There is NO correlation between limits of liability (which set out the maximum extent of your liability for damages) and limits of cover (which set out the maximum extent of the insurer’s liability for damages).

The two contracts operate independently.

A tenuous link

However, the courts can take into account the amount of your insurance cover (if you have it) in deciding whether the limit of liability stated in your contracts with your clients or contractors is reasonable under the Unfair Contract Terms Act 1977.

In Ampleforth v Turner & Townsend the court had to review a limitation clause in these terms:

Liability for any negligent failure by [TTPM] to carry out Our duties under these Terms shall be limited to such liability as is covered by Our Professional Indemnity Insurance Policy terms…and in no event shall Our liability exceed the fees paid to Us or £1million whichever is the less

Under the terms of their appointment TTPM agreed to take out PII with a limit of indemnity of £10m. The court considered whether the limit of liability was reasonable and was entitled (s11(4) UCTA 1977) to consider TTPM’s insurance cover.

HHJ Keyser said that the limit of liability was unreasonable and explained his reasons:

The central factor that leads me to that decision is that the contract imposed on TTPM an obligation to take out professional indemnity insurance to a level of £10 million. The cost of such insurance would, as a matter of commercial reality, be passed on to the Trust within the fees payable. Yet the limitation clause would result in a limit of liability equal to the fees paid to TTPM, which is £111,321 (together with whatever might be awarded on the counterclaim). In the absence of any explanation as to why in this case TTPM should have stipulated insurance cover of £10 million despite a limitation of liability to less than £200,000, I consider it unreasonable that the contract purported to limit liability in that manner. The effect of upholding the limitation clause would be that, although the parties had contracted for the insurance of the risks and (implicitly) for the Trust to pay for that insurance, far the greater part of that insurance would be rendered illusory.

What should you do?

Remeber, having insurance does not limit your liability to your clients. Insurance provides an asset against which claims may be made. You need both to safeguard your business.

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