Business, Contracts and Insurance

When we draw up contracts intended to limit liability for our business clients, we normally suggest that our clients either:

• Check their present business insurance covers the work anticipated in the contract
  
  
• Or get a quote to ensure they are covered.

“So, what’s the point of a contract at all then?” we are reasonably asked.

The reality is that contracts don’t (or shouldn’t) just deal with issues of liability, although that is a crucial part of them for sure. They should also ensure that there is actually an enforceable contract at all. Just because a contract document is in existence does not mean it is a fully legally binding contract.

A good contract should also set out the relationship between the people involved, and deal with matters such as how payment is to be calculated and paid, how the contract ends (often entirely missed out), who owns any intellectual property (created by the contract) and any rights arising in relation to it, what law applies (especially when dealing with a business from a different country), methods of resolving disputes and avoiding Court and so on.

Apart from that if your contract limits liability then the risk is lower so the insurance premium should be and often is lower, after all the risk to the insurance company is lower then too. But in the UK we are not allowed to limit liability for personal injury or death arising from negligence, often the most likely danger when dealing with a consumer. It is not just “not allowed” though. If your contract actually does read as limiting that sort of liability even if you didn’t mean to do so, there is a great danger that if it is not carefully drafted a Court would ignore the whole of that paragraph in your contract which means you would have unlimited liability - that’s frightening.

Are your present contracts enforceable?

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Does your present contract say something like “we will not be liable for anything / not liable above £1 million for any claim no matter how caused” or similar? If so, change this immediately. In our view that is likely to be regarded as an attempt to limit liability which breaches the above rules.

So, insurance is important to cover your business for the things that cannot be dealt with in UK law by using a contract - the risks of personal injury or death. Don’t forget, advice can cause either of these things just as much as when you sell a product. Apart from that you can’t normally limit your liability in all areas unless that limit is reasonable so that is not normally the figure of nil. There is a greater degree of statutory protection for consumers which generally cannot be overridden, so if you deal with consumers rather than businesses you are much more restricted as to how far you can limit your liability. Can you afford to pay any such claim? A limited company is not as much protection as it once was but if you have unlimited liability personally (e.g. if you are a sole proprietor or a partner) your house and all belongings are on the line so do insure.

A quick general guide is:

• Check your policy covers every new contract you undertake
  
  
• At least get a quote for cover if you don’t have any and make a commercial risks/benefits decision whether to have it or not
  
  
• Make sure your contracts don’t actually get you into (rather than keep you out of) trouble.

And especially if you are an IT contractor you may well think it wise to insure against IR35, VATt and general tax investigations. The premiums are not that high but the costs of defending an investigation properly can be huge.

So, we will often suggest you insure and can put you in touch with a specialist broker to complement what can and should be dealt with in your business contracts.  

Contact Cousins Business Law for advice on this topic. 

Article updated 21st October 2011

For free advice on this topic please call us on 0845 003 5639.