Contractual Liability – are you covered?

Contractual Liability – are you covered?

Steven Cox is Head of Office at Lockton Companies Aberdeen and is a guest on our third edition of our “Business Spring Clean” blog series on Insurance. Here’s what Steven had to say…

Contractual Liability – are you covered?

At the opening breakfast session at Offshore Europe in last September, the panel spoke of the continuing need for collaboration and protecting the supply chain.  As an insurance broker reviewing contracts for our clients, the majority of whom are supply chain businesses, there has been little sign of this historically or in recent times and, if anything, the risk allocation provisions are  getting worse.  From an insurance perspective, the primary risks are property damage, bodily injury, pollution and consequential losses.

I feel that the (unamended) forms of LOGIC standard wordings provide an almost perfect risk “landscape” for all parties.  The key here is “unamended” as sadly, the ever present list of amendments – generated by and typically in favour of the Company / Principal – often changes the allocation of risk fundamentally.  Ultimately, LOGIC is voluntary and a UK construct, which does not necessarily translate to other territories.

Given the global nature of the Energy sector and the fact the transition to offshore renewables and indeed other areas, brings different forms of contract, where there is often little if any protection from counter-party losses, meaning liabilities for the key insured risks are simply passed down the supply chain.

As an insurance broker, our role is to advise our clients how their insurance operates (or does not) in relation to these key risks and we do this by reviewing both the Insurance and Indemnity/Liability clauses within a contract.

  1. Insurance Clauses dictate the classes of insurance, minimum limits of cover and policy features required.
  2. Indemnity Clauses deal with the allocation of responsibility for costs/losses in the event something goes wrong.

The ideal position is a mutual (‘ground up’) indemnity for the key risks and also for third party losses.  The  drive to ‘de-risk’ the Principal / Company’s position, rarely considers the realities of pushing increased levels of risks “down the line”, in terms of the finite scope and nature of the insurance cover that is available to the supply chain.  Risks such as counter-party losses and hydrocarbon pollution (to name but two) are potentially devastating to a small-to-medium-sized business, even where a cap/limitation is provided.

So what is the protection under an insurance policy?  Whilst a typical oil and gas Employers & Public Liability policy provides cover for legal liability, almost all were written some time ago and have generally not evolved to meet the changing contractual landscape.  Where contractual liability cover is given it will generally contain caveats that require “LOGIC” or “standard” or “mutual” contract terms, and exclude areas such as liability resulting from the negligence of external parties, or even non-Oil & Gas work.  Much of this is wishful thinking at best, and the reality is that many businesses are caught between restrictive insurance cover and the pressure to accept unacceptable levels of “commercial risk” under contract, in the hope that nothing goes wrong.

To be fair, there are some risks that are not insurable and will always be a matter of contractual negotiation but it is unlikely that the insurance market as a whole will change their position any time soon.

Given the positive messaging about collaboration and partnership with the supply chain, the opportunity exists for operators and service companies alike to adopt a pro-active approach to risk allocation when issuing contracts.

Over the last few years, Lockton have spent a great deal of time working with clients and their legal advisors, to get a better understanding of the contractual position our clients find themselves in.  Combining this with our own knowledge, we have created a bespoke insurance policy which addresses a range of these issues in a way that is not readily available elsewhere.

This is by no means a silver bullet, but it provides a broad foundation upon which our clients can sleep easy when they look at accepting some of these additional risks, and allow them to  focus on other aspects of the contract.

Steven Cox is Head of Office at Lockton Companies Aberdeen

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