Sunday, June 23, 2013

Managing how Contract terms get interpreted

I had the following question from a reader and thought it and my answer should be shared.

“In our contract there are lot of cross references, and almost 40 % paragraphs end up with such wording as "this paragraph A is without any limitation or prejudice to paragraph B mention under clause 20"
I need you to clarify what does this wording mean ....”

The general rule in interpreting contracts is contract terms are considered to be complimentary and will be read in their entirety to determine the intent of the parties, This means that a contract terms in one section could limit or restrict what was stated in another area. It also means that in interpreting the intent of the parties, what was stated in one section could potentially impact how another section is interpreted. A classic example of this is you could have language in one area that provides for a specific remedy in the event of a breach, but a limitation of liability section in another location could limit that remedy.

The language shows the intent of the parties for interpretation of the contract. It is saying that for that specific section where it is used, you don't want the general rule for interpreting the intent of the parties to be followed. You want both of those sections to be interpreted independently. What is said in paragraph “A” cannot be interpreted to limit what is stated in “B”. Further you want was stated in “A” to also not prejudice the interpretation of “B”. That way “B” is interpreted independently of “A”.

Wednesday, June 12, 2013


Someone recently asked me about subrogation and specifically waiver of subrogation so I thought I would write about it. Subrogation is a form of assignment of claims. For example if there is an insured loss, as part of the insurance payment, the insured in endorsing the check is assigning their rights to make a claim to the insurance company. The insurance company could then make a claim against another party or parties who may have been negligent in causing the damage or loss covered by the insurance. In contract insurance provisions many companies will include a waiver of subrogation to prevent the other party’s insurance company from suing them for their potential negligence. The rationale is simple, I’m requiring you to carry insurance, so I don’t want your insurance company turning around and suing me. Without a waiver of subrogation they could do that.

How much could their insurance company sue you for? The insurance company has no greater rights than their insured has under their contract with you. I’ve had contracts people ask about limitations of liability for buyers. In most cases the way a limitation of liability provision is drafted, both parties will be precluded from all types of damages other than direct damages. The supplier will want to add a financial cap on their liability. The buyer may want to exclude specific sections from that limitation. If the contract doesn’t have a waiver of subrogation provision and the buyer hasn’t put a cap on the buyer’s liability, the buyer could potentially have unlimited liability. So just like supplier’s wanting to cap their financial liability, buyers also need to cap their financial liability. This way if the supplier insurance company were to sue under subrogation of claims, it would cap the amount they can recover. What’s an appropriate cap for Buyers liability? For small contracts it could be capped at no more than the contract value. For large value contracts, if you exclude payments that you owe, it could be much less than the contract price.

Sunday, June 9, 2013

Insurance - Additional Insured versus Joint Insured

In a LinkedIN group someone asked about the difference between an owner being named an “additional injured” versus “jointly insured” and which was better for the contractor.

The key in any insurance is who does it cover and what is the coverage for as that is the basis upon which an insurance will decide to underwrite the policy and it’s also a basis upon how they will price the insurance coverage. There is a second issue that also comes into play in these decisions for the contractors which is the law of Agency. Under the law of Agency, a principal may be liable for the acts of their agent, whereas an agent will never be liable for the acts of the principal. Under agency the owner or client would be considered the principal in the relationship and the supplier or contractor would be the agent.

An agent can wind up being liable or having their insurance company be liable in two situations. One of those situations is if the agent agrees to a broad general indemnification in their agreement where they agree to indemnify the principal against all claims, including those resulting from the principal’s sole or partial negligence. The second way would be if there a commitment that the principal was jointly insured.

Naming the principal an “additional insured” would allow them to claim against your insurance. Since your insurance only covers your negligence, an insurance company may agree to make the principal an additional insured as they are assuming no new or additional risks.

“Joint insured” means claims could go against either your or their policy. Insurance companies will reject the "joint insured" approach, as they do not want to be assuming claims for the negligence of the principal. They know what risks they are assuming in underwriting you, they don't know what risk the client may bring and simply do not want to be insuring them either by broad indemnifications or joint insured requirements. In fact a joint insured approach really provides the agent nothing. A party that’s injured by the negligence of the principal can’t sue the agent, they need to sue the principal. So making it “jointly insured” provides no value to the agent. What it would do is allow the principal to claim against the agent’s insurance for claims involving their negligence.

As claims against insurance affect your future premiums, you always want to avoid agreeing to language that would increase your potential exposure. I would advise you to follow the guidance of your insurer. This means that even if your insurance company would agree to provide insurance against an indemnification covering the principal’s negligence or if they would agree to “joint insured”, as a supplier or contractor you shouldn’t want to agree. If you agreed their would have pushed both the risk and cost to you and if there were claim, those would impact your future cost of buying insurance.