It’s important that businesses take steps to ensure that they are well-equipped to navigate the complex world of contractual agreements and insurance requirements.
Australia has been enjoying a sustained period of growth across the transport and civil construction sectors.
There has been considerable construction activity in mining and civil construction in response to the growing global demand for critical minerals. There has also been growth in the general construction sectors (i.e. residential, commercial, institutional, health).
The key drivers for this growth came initially from bullish State and Federal government stimulus spending in response to the COVID pandemic, which continues to be pushed along in response to strong population growth pressures and the need to ensure our urban and regional environments have the facilities to cope with this persistently increasing demand.
This creates a pipeline of available work opportunities for the earthmoving and civil sectors, probably for at least the next five years.
UAA’s National Underwriting Manager Gary Woodhams said the positive outlook was certainly very good news, but warned that there are also many risks and challenges in business which need to be identified and mitigated.
“We all know the harsh reality is that all projects come with human, material, legal, financial, environmental and regulatory risk,” he said.
“Understanding contractual and insurance obligations is just as important as managing physical equipment and site-based operational risks.”
Gary said it was imperative to maintain a consistent approach and engage the experts when it comes to contract management and insurance.
Obtain quality legal advice
It is well known that contractual wording can be complex and fraught with risk for the unwary. Engaging a lawyer who has experience and expertise with operation contracts is a smart risk management investment. They can help you navigate complex indemnity clauses and:
- Ensure they are workable from your standpoint
- Align with your insurance coverage
- Do not leave you with uninsured and unmanageable exposure.
“Experienced lawyers understand the practical realities of civil operations,” Gary said.
“They can identify uninsurable risks in contract terms (which may be required to meet contract requirements) and assist you to negotiate reasonable contractual terms. They can also help you liaise with your insurance broker to convey your insurance requirements for a given contract.”
Establish your operational risk profile
Before making any contact and engaging in negotiation, your lawyer will need to understand your risk profile to support the negotiating position and insurance requirements, including:
- Your safety record
- Equipment condition
- Operator qualifications
- Financial stability
- Provide documentation on operational procedures, safety management systems and any other documentation to support risk management processes.
- Specific site risks
- Copy of insurances and extensions
Indemnity clauses
An indemnity clause transfers risk from one person to another.
“It can be specific (e.g. a promise to hold a person harmless in relation to an occurrence from a particular event) or broadbrush (e.g. to allocate risk of loss, damage or liability from certain events),” Gary said.
“Your insurance coverage needs to align as closely as possible to the requirements of such indemnity clauses. Importantly, you will also need to identify uninsured risks required by the indemnity clauses which you will have to manage in other ways.”
The indemnity clause may enforce a legal requirement on the contractor to indemnify the principal (i.e. your client), from any direct or vicarious liabilities to third parties that may arise from your activities. In some cases, the indemnity in favour of the principal may require you to assume liability that is beyond normal legal requirement.
Public liability policies typically cover the insured against legal liability it may have to third parties for loss or damage to property, loss of use of undamaged property, or personal injury which arises out of an insured party’s activities. Therefore, a contractor’s liability under an indemnity in favour of the principal, against third party claims caused by the contractor’s activities, is likely to be covered under a public liability insurance issued to the operator.
For this reason, a contractor’s lawyer should seek to negotiate and limit these indemnities as closely as possible to loss or damage arising from negligence of the contractor (i.e. strictly fault-based indemnities).
Mutual (fault-based) indemnification clauses require each party to the contract to assume responsibility for losses arising from their own negligence. This is a reciprocal obligation where both parties indemnify each other with the aim of helping to reduce the likelihood of disputes between parties to the contract by keeping each party’s strict legal liability obligations separate and clear.
“It is important to note indemnification clauses need to be carefully reviewed to ensure they are enforceable and as far as possible, insurable,” Gary said.
“It is even more important to identify uninsured risks so other forms of risk management can be applied. Once we start going beyond fault-based indemnities, we become open to potential for uninsured loss.
“It is critical to remember that insurance policies are limited to their terms, conditions and exclusions and can only be extended to meet contractual indemnities within the insurer’s restraints. Most policies contain a contractual exclusion (unless the liability would have been incurred even in the absence of the contract).”
Insurance requirements
After you have reviewed the indemnity clauses, the insurance clauses need to be carefully reviewed.
The type of insurance you have (or will require!) needs to match, as far as possible, the insurance clauses in your contract.
(Note: Non-insurance people often confuse “indemnity” with “insurance” in a contract, believing them to be the same thing. They are not the same. As you will now know from this article, they are two distinctly different facets of contractual requirement).
Speak to your insurance broker
They are your professional risk advisors.
“Our recommendation is to engage your broker early – from the commencement of the tender process,” Gary said.
“In collaboration with your lawyer, your broker will provide those critical inputs at the right time on insurance coverage, limitations, and gaps. They will explore extensions or other policies to ensure you are covered as far as possible for any outstanding coverage requirements and should explain where you are not covered.”
Never leave it to the last minute to engage your broker or – worse – after you have signed the contract.
At the end of the day, professional guidance is essential for you to be fully aware of the risks involved and to allow you to make an informed decision before committing yourself to any contract.
