While there are no guarantees, implementing strong risk management measures when drafting contract with clients can help engineers achieve more favourable insurance outcomes.
The cost of insurance is dependent on a lot of factors, from the insurance market and your claims history to the size and scope of your projects, so there is no simple way to go about reducing premiums. That being said, there is a way to put yourself in the best position possible – keep insurance front of mind when drafting contracts.
The more risk management measures you have in place when entering into contracts with clients, the more you can limit claims and show insurers you are serious about minimising claims and reducing business risk.
What follows are four questions that can help engineers approach future contracts.
1. Do you use standard terms and conditions with every contract?
To understand how contracts affect insurance, it’s always helpful to take the perspective of the insurer.
Imagine two clients. The first is an engineering firm that wants to maximise their revenue, and so always uses the same insurance and liability clauses to save time and money. The second is a firm that pays attention to the unique aspects of each new project and makes sure the contract’s terms and conditions are fit for purpose.
For the insurer, it’s clear that the second firm is doing more to reduce its risk of a claim. Every contract contains unique exposure, so they should all be treated on a case by case basis. A smaller project with no subcontractors will have different requirements from a large construction project with multiple subcontractors, for example.
Ideally, you should always have professional legal counsel review all contracts and amendments wherever possible.
2. Do you always enter into a written contract with your clients?
While it’s true that binding contracts can be made orally – even with just a few words and a handshake – you should always have a written contract that outlines the responsibilities and expectations of all parties. This is true even if you’re undertaking a quick project or an additional, unforeseen component to an existing project.
Who is responsible for what part of the project? What activities are and aren’t covered? What level of insurance must each party have?
These questions and more are why written contracts are a must.
Should a claim be made, the lack of a written contract introduces greater complexity to proceedings, which usually results in higher legal costs. In court, the terms of written contracts have frequently been the cause of extended debate, where both sides argue about the exact meaning of certain phrases. Given this, just imagine the difficulty of settling disputes regarding oral contracts.
3. Do you limit your liability under contract either by scope of activities or dollar value?
If a contract doesn’t contain clauses that address and limit liability, the liability of all parties is technically unlimited. So it’s no wonder insurers favour contracts that appropriately limit and exclude liability.
There are a few ways liability limitations are placed into contracts, these include:
- Outlining what parties are responsible for which activities, and the extent to which they can be held liable for something going wrong
- Specifying time frames within which a claim can be made
- Capping the dollar value of potential claims
Liability caps can be applied both on a per claim and aggregate basis. The latter sets a total dollar value to liability, and is often wise as it gives insurers more certainty.
While clauses that limit liability are important, unfair contract laws mean you can’t simply draft a contract that avoids all your responsibilities. In general, clauses can’t cause a significant imbalance between the parties and they should be reasonably necessary to protect legitimate interests.
Again, professional legal advice should be sought to ensure your contract is fit for purpose.
4. Do you always exclude liability for consequential losses in your contracts?
In broad terms, a consequential loss (also called an indirect loss) is a secondhand effect. It’s a further loss that occurs after, and because of, a direct loss. There are various types of consequential losses, including loss of profit, loss of future contracts and losses caused by business interruptions.
To help you understand the difference, imagine an engineering firm that undertakes a project. This project has a production delay (from a machine breakdown, for example). The production delay is identified, examined, and fixed. Due to the delay, there is a business interruption that leads to loss of income and the customer deciding to no longer do business with the firm.
In this hypothetical, the cost of identifying and fixing the problem is a direct loss. The loss of income is also a direct costs, if the costs of delays are referenced in the original contract.
On the other hand, the loss of a customer is a consequential loss, because while it’s intimately tied to the project’s original problem, it’s an indirect result.
When looking to exclude consequential losses from a contract, it’s best practice to separately identify all types of losses you could experience, as the failure to do so can potentially leave the contract open to dispute.
Consequential losses can increase the exposure you have on any given project. That’s why it’s generally a good idea to exclude liability for them when drafting contracts. You will tend to get better insurance outcomes when it’s clear that you aren’t liable for unforeseen aftereffects.
EngInsure are here to support you with important PI Insurance advice and solutions to reach the best possible outcome for your business. For assistance, please get in touch with one of our specialists:
T: 1300 854 251
E: info@enginsure.com.au
This article is not intended to be personal advice and you should not rely on it as a substitute for any form of personal advice. Please contact Whitbread Associates Pty Ltd ABN 69 005 490 228 License Number: 229092 trading as EngInsure Insurance & Risk Services for further information or refer to our website.
