It is now several years since the commencement of proportionate liability in New South Wales1 yet it continues to wreak havoc in the allocation and management of risk in a variety of contexts. This is particularly so in the context of construction projects where parties routinely contract out of proportionate liability in an attempt to avoid a multiplicity of claims arising when something goes wrong.
An unintended consequence of such attempts to simplify the allocation of responsibility is that the relevant party may be partially uninsured, leaving both that party and the claimant exposed.
Liability policies generally exclude an insured's liability in contract except to the extent that such liability would have arisen even in the absence of the contract. This is because insurers price policies based on an insured's normal liability at law (e.g. in tort) and do not wish to cover additional matters arising under a contract.
In jurisdictions where it is possible to contract out of proportionate liability, including NSW, any party doing so will be contractually expanding liability from their proportionate contribution to joint and several liability. This means a claimant can seek 100% of their loss from a single party. That party is then required to seek contribution or indemnity from any joint tortfeasors or under any other available contractual indemnities. Where such other parties are impecunious or for some other reason are unable to meet the contribution or indemnity claim, the first party will be left bearing 100% of the loss. In contrast, if proportionate liability applied their exposure would have been limited to their proportionate contribution.
In addition, the effect of a contractually assumed liability exclusion is to limit the insurer's liability to the proportionate contribution. The party is effectively uninsured in respect of any greater amount. Where a party's contribution to a particular loss is relatively low (e.g. 20%) this could result in most (e.g. 80%) of the claim being uninsured. This has implications for both principals and contractors.
For contractors, it is obviously undesirable to carry a significant uninsured exposure. This may cause substantial financial hardship and even insolvency in the event of a substantial claim.
The potential gap in cover caused by contracting out of proportionate liability was identified by us and other insurance experts at the outset. However, it has taken some time for the message to filter through to contractors and many still carry this often unintended and unknown exposure.
For principals, who routinely require parties to contract out of proportionate liability so that a single claim can be made rather than multiple claims against all concurrent wrongdoers, it is not enough to simply rely on seemingly robust indemnity clauses. The broadest indemnity is of little comfort if the liable party cannot meet the claim due to an absence of insurance cover.
Accordingly, it is equally important for principals to ensure that, when requiring parties to contract out of proportionate liability, such increased exposure is covered by insurance.
Addressing the gap
Obtaining cover for contractually assumed liability is not always easy. Although insurers would be entitled to bring a subrogated claim against any joint tortfeasors or other indemnifiers, the additional cost and risk of doing so means that they are reluctant to revert to the joint and several liability regime they successfully campaigned against.
If reliance is placed on a standard 'off the shelf' policy covering all of a party's activities, the insurer is unlikely to agree to remove the standard exclusion. Nevertheless, particularly for more sophisticated insureds and larger projects, it may be possible to remove the contractually assumed liability exclusion or at least modify it so that it does not apply in respect of a particular project/contract, ordinarily assumed liabilities or contracting out of proportionate liability only. Insurers are more amenable to expanding cover where the relevant risks can be identified and quantified.
For major projects, a project specific policy may be maintained covering all relevant parties (e.g. the principal/developer, head contractor and subcontractors) for contractual liability where the parties have contracted out of proportionate liability. This is the preferred approach to ensure that all losses are covered regardless of the contractual allocation of responsibility between the respective parties.
It is important that issues of risk allocation, indemnity and insurance are addressed at the earliest opportunity. This will ensure that a robust indemnity and insurance regime is negotiated with sufficient time to obtain the right cover to address any potential gaps in coverage.
Otherwise, parties may find that their insurance is not there when they need it most and principals may find that their seemingly vigorous indemnity regime is a mere chimera.
1. A limited regime of proportionate liability existed in 'building actions' for several years prior to the implementation of proportionate liability under the Civil Liability Act 2002 (NSW).
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