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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