Contract review: Mitigating risks and ensuring adequate insurance coverage

The importance of contract review

In the context of liability insurance, the contracts that stakeholders enter into with their customers are fundamental to risk exposure. Most liability insurance policies are based on the limitations under standard terms and conditions or applicable international conventions. Without proper scrutiny and agreement with the insurer, there is a potential for gaps between the contractual liability and the insurer's covered legal liability, leading to existential financial risks.

Understanding the purpose of contracts

A contract is a tool for structuring relationships and recording agreed-upon responsibilities and penalties for failure to perform services. It should clearly state the services, cargo types, values, territories, modes of transport, and whether subcontracting will occur. It should also address penalties, force majeure events, applicable laws, jurisdiction, and dispute resolution mechanisms.

Commercial risks and informed decisions

While businesses may knowingly enter into contracts that present financial exposures, including consequential losses or risks to the fundamental business, the key is ensuring that the decision is an informed one and that the extent of insurance coverage is clearly understood to avoid surprises in the event of significant losses.

Disclosing contracts to insurers

Most insurers, including TT Club, will not cover exposures under contracts that go beyond predetermined parameters unless they have reviewed and specifically agreed to the terms. Stakeholders are encouraged to discuss contracts with insurers before signing to ensure adequate coverage.

Common contract review requests

One common request is to uplift the limit of liability above recognised terms and conditions, which may be acceptable at an agreed additional premium. However, if the liability uplift is not identified or agreed upon, insurance coverage will only respond to the statutory limitation, potentially leaving a financial liability for the stakeholder.

Key clauses to review

When reviewing contracts, stakeholders should look for clarity and relevance of liability linked to negligence, absence of liquidated damages or consequential losses, law and jurisdiction, force majeure, time bar, and no conflicting clauses. Liability should be fault or negligence-based, fair, and reflect the financial exposure.

Addressing irrelevant clauses

Sometimes, stakeholders may encounter contracts with irrelevant or unsuitable clauses, often due to the use of incorrect corporate templates. In such cases, it is recommended to list the concerning clauses, highlight them to the customer, and challenge them, potentially with the insurer's input on uninsurable aspects.

Periodic reviews of long-term contracts

It is important to undertake periodic reviews of existing long-term contracts, especially when services evolve, to ensure the contract remains fit for purpose and reflects any changes or additional services.

Final considerations

Contracts should have no contradictory clauses and clear, fair pre-agreed conditions and penalties. Stakeholders should discuss contracts with insurers before signing and understand the risks of signing a contract that falls outside the provided coverage. Proper training, identification of critical clauses, and understanding of implications are crucial. Legal advice may also be necessary in some cases.