Contracts and Insurance – What is contractual liability?

As a business owner and operator, there would be many occasions where you are required to enter into contracts to provide or receive goods and services.

 

A written contract usually includes insurance and liability terms. Failing to understand and double check your liability and contract insurance requirements can potentially expose you to significant financial stress.

 

In this short blog, we will explore the role of insurance in your business deals and how to make sure you and your business is covered.

 

What is a contract?

A contract is an agreement between two or more parties for an agreed outcome.

Contracts can be written or verbal and can cover a wide range of circumstances including; Labour Hire, Work Performance and the rental or lease of premises or equipment item.

 

Having a written contract is a good idea when the value of goods and services could have a substantial impact on your business viability – in the building industry, all works valued more than $3,300 (must have a written contract *).

 

What is included in a contract?

A written contract will include the name of the parties, description of work, payment terms, dispute resolution process, termination terms, indemnity and insurance terms and more.

For more information about how contracts are written visit https://www.business.gov.au/info/plan-and-start/start-your-business/independent-contractors/understanding-contracts/what-do-i-include-in-a-contract

 

Why are the insurance and liability terms important?

Indemnity sets out when and how the hirer can be compensated for any loss as a result of your work.*

Insurance clearly identifies the insurance obligations of each party.*

The sum of the two is described as your “contractual liability”.

 

In some cases, the protection offered by your existing business insurance policies to cover your indemnity obligations or the insurance requirements for a contract may not be available, and if it is available, it may have a very high premium.

 

A simple example would be a garden / maintenance person who tendered for a job to look after the front lawn of a large corporation. Now, to win the job they were given a contractual agreement to sign, only to discover that they could not obtain public liability insurance which would meet the requirements under that contract. There were some requirements in the contract that the insurance would protect. However, the cost of the general liability insurance was much more that was he or she had quoted to mow the lawn.

 

In some instances, small, home-based businesses might not have any relevant insurance to cover their liability under the contract. For more information about small business insurance read our blog here.

 

What can you do to make sure you are protected and can meet the terms of the contract?

 

It is always a good idea to get any contract checked by your lawyer but having your insurance broker review the insurance and indemnity terms before you sign can also save you time and money. Remember your signature is your agreement that you have made an informed decision before signing.

 

There are also lots of different types of insurance to help cover your contractual liabilities – some of them are unique to the job or task in the contract.  You’ve probably heard the terms:

  • Contractors Insurance
  • Contractor liability insurance
  • Small business insurance
  • Building insurance
  • Professional Indemnity Insurance
  • General Liability Insurance
  • Public Liability Insurance

 

To find out which one is right for you, call IAGB today.

 

Sources:

https://www.business.gov.au/info/plan-and-start/start-your-business/independent-contractors/understanding-contracts/what-do-i-include-in-a-contract

http://www.qbcc.qld.gov.au/contracts/when-you-need-contract

https://www.thebalance.com/what-is-contractual-liability-462636

 

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