One of the most common misconceptions I come across, when delivering contract awareness training to consultants or contractors, is the belief that an insurance policy limits your liability to your clients.
It doesn’t.
Insurance is merely an asset against which your clients could bring a claim. The impact of the insurance will depend on what the damages they are awarded:
- If the damages exceed the amount of your cover, you will have to pay the rest (and your excess).
- If the damages are not within the scope of your cover, you will have to pay their whole claim.
- If the damages are below the amount of your cover, you will still have to pay your excess and any costs not covered by your insurance.
Limiting your liability
Under Scots law (the Unfair Contract Terms Act 1977 for B2B transactions), a limit on liability for breach of contract has to be fair and reasonable if the courts are going to allow you to rely on it. [English law requires it to be reasonable but the factors and court analysis are very similar.]
A Scots appeal case had to consider the interplay of insurance, damages and limits on liability:
- The maintenance contractor had public/product liability insurance for the relevant period with an indemnity limit of £5m for any one occurrence.
- The maintenance agreement limited their liability to £3,225.
- The agreed damages were £29.68m as a result of a fire, which could have been avoided if the maintenance contractor had advised the client to change polypropylene hoses with jubilee clips to braided metal hoses with specific fittings.
- The maintenance contractor was liable for this omission to give relevant advice as it was a breach of their duty of care – a negligent failure.
The court had to determine whether the limit in the contractor’s ‘standard’ maintenance contract was fair and reasonable.
UCTA lists factors to be considered, including:
- resources available to meet any liability eg any relevant insurances
- the relative bargaining position of the parties – ie their size, scale and resources
- any inducements to agree to the term – it was never discussed or negotiated over the 4 previous years of working together
- whether the client knew about the term – the contract was signed before each site visit and the client was aware of it.
The analysis
The court noted that the contract was not in any way complex (and only 6 pages long in normal font size).[Yay!]
The clause limiting liability was clear and was made more prominent by a WARNING – underlined and in capital letters.
The court considered that it would have been unrealistic to expect the maintenance contractor to obtain sufficient insurance to cover the sorts of losses that each of its clients might sustain. The factory owners were in a far better position to assess the size of any potential losses. The contract – by limiting or excluding the contractor’s liability – placed the onus on them to insure those losses.
As a result, the maintenance contractor’s limit on liability was upheld as fair and reasonable.
What should you do?
As part of your deal, consider which business should bear the consequences of specific risk events. Risks can be avoided, mitigated, managed, insured against and shared – don’t just dump them on someone else.
Be aware that limits or exclusions of liability in a contract can leave you holding the consequences of specific risk events – insure against them where possible.
But don’t rely on your insurance to limit your liability to a client.
Case: Benkert UK Ltd v Paint Dispensing Ltd [2022] ScotCS CSIH 55
