Monday, October 24, 2011

Limitations of Liability versus Insurance

When would you carve insurance out of the limitation of liability?

When you contract with a supplier you may require the supplier to carry a number of insurance policies such as:comprehensive general liability; comprehensive automobile liability; workers compensation; employers liability; crime or employee fidelity; property liability; professional errors and omissions; umbrella liability; or excess liability. (A description of each is in the March 10, 2011 post). Many times the limits of the insurance coverage may exceed the contract price. Unless specific items are carved out of the limitation of liability provision, the limitation of liability provision would limit what could be recovered under those provisions. For example if you required $5.000,000 for comprehensive and general liability and $5,000,000 for auto liability but had a cap of $1,000,000 in the limitation of liability and didn't carve the insurance provision out of the limitation of liability, the most you could collect would be $1,000,000. Carve outs from the limitation of liability can be done either in the limitation of liability section or in the specific section you want to exclude from the limitation such as insurance.

A limitation of liability is about limiting the liability of the parties to the agreement. It's not about limiting the liability of their insurance company. When you carve insurance requirements out of the limitation of liability that has absolutely no impact on the supplier. The supplier has no greater exposure. Their liability is still limited to what was agreed in the contract. What it would do is create a form of deductible to the supplier’s potential liability. For example, if you had a $5,000,000 policy and suffered insured damages of $5,000,000 or less, the insurance company would pay and the supplier’s only cost would be their deductible..If the loss was $6,000,000 and the supplier had a $50,000 deductible on the policy and you had a $1,000,000 limit of liability, the insurance would pay $4,950,000, the Supplier would pay the $1,000,000 and you would have $50,000 that you couldn’t recover..

If your limitation of liability already excluded a general indemnification where the supplier agrees to defend, indemnify and hold the buyer harmless from third party claims for personal injury or property damage you probably wouldn’t need to include a carve out in the insurance provision if that was the only type of liability that you were concerned about. If the coverage
addressed loss or damage to your property a general indemnification would not protect you. So if the limit of liability was less than the insurance coverage you would need to either carve the insurance provision out of the limitation of liability.

On something like this you should always work with your lawyer, Here’s an example of what carve out language in an insurance section could look like.

“Any limitation of liability set forth in this Agreement shall not preclude Buyer from claiming under any insurance placed or provided pursuant to the Agreement up to the full amount payable under such insurance.”

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3 comments:

  1. It could, so you would always check the laws of the applicable law and jurisdiction of the contract.

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  2. Although the Supplier may not have additional exposure in the example given in the second paragraph of your post, commercially, the Supplier will be subjected to higher insurance premiums in the event of significant and/or multiple insurance claims. That is more of an internal commercial item for the Supplier's risk group to handle but nonetheless, is a reason why the Supplier would not agree to carve out insurance proceeds from its liability cap.

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  3. Dear Anonymous, Most Insurances deal with third party claims based upon the supplier's negligence. Limits of Liability deal with claims between the parties for contractual breaches. The two are different. The only time not agreeing to carve out insurances would do anything is if the injured party only sued the Buyer which is highly unlikely. If they sue the supplier the LOL will have no impact. Damages they have to pay a third party directly would never be subject to or impact the agreements's LOL. If a supplier didn't want to carve insurance out of the LOL, Buyer's would simply demand higher limits to cover the increased risk. All that would do is increase their potential contractual damages risk for claims by Buyer. If there are no third party claims, the Buyer has the full amount of the LOL to claim against. As to your comment about premiums, premiums are based upon claims. How you treat it in the contract in the LOL has zero impact on the frequency and amount of claims.

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