Australia: Insurance clauses: Part 2 – Whats in a name?

WHO SHOULD READ THIS

  • Anyone involved in contract negotiations and procurement

THINGS YOU NEED TO KNOW

  • A named insured is entitled to make a claim under a policy but a party whose interests are 'noted' probably will not.
  • Insurance policies contain extended definitions of who is insured which can be triggered by the terms of commercial contracts.
  • Failing to effect insurance when a contractual promise has been made to do so will expose the maker of the promise to damages for breach of contract.

WHAT YOU NEED TO DO

  • Pay careful attention to insurance clauses in contracts and how they interact with indemnity clauses.
  • Where one party to a contract agrees to take out cover for others, make sure in advance that suitable cover can be commercially obtained and that the policy meets the contractual obligations.

In our  last focus article, we looked at how insurance clauses can deliver greater certainty and efficiencies in contractual risk allocation as well as some options for placement of insurance policies that deliver that outcome. In this article, we examine the mechanisms that determine who is to be insured under a contract and how insurance policies define and categorise insured parties. We also consider the consequences if a party fails to arrange insurance under a contract.

Named or Noted?

There are a number of mechanisms used in contracts as a trigger to require one party to effect insurance cover for the benefit of another party or third parties. Amongst the most common are the requirement to 'name' a party as an insured or to 'note the interest' of that party under the policy.

When a party is a 'named insured' it generally signifies that they are a primary party to the policy and are therefore entitled to make a claim for cover. Therefore, parties agreeing to 'name' a party as an insured should be certain that they wish to allow other parties to have the right to make a claim.
They should also ensure in advance that their insurer will permit this to occur. Insurers may not automatically be willing to take on this additional risk or may require further information and additional premium before agreeing to do so.

A party whose interests are 'noted' under an insurance policy is not a contracting party and it is unlikely that they will be a non-party beneficiary who is entitled to cover under the policy.  Where a contracting party assumes the obligation to effect cover for another party under an insurance clause, the mere noting of that party's interests will not be sufficient to discharge that obligation.

Who is an Insured?

Policies will specifically define who insured parties are. As mentioned, a party will be an insured when they are a contracting party to the policy and are therefore a named insured.

In addition to the named insured, most policies will have an extended definition of who is also entitled to cover as an insured. Depending upon the type of policy, this can include a range of additional parties such as subsidiaries of the named insured, directors and employees, subcontractors and consultants and spouses of an individual named insured. The class of parties who are entitled to cover will depend upon the needs of the party who takes out the policy.

Extensions of cover

Another mechanism for providing cover to third parties are policy extensions. Extensions are clauses which trigger an entitlement to cover for specific classes of insured, often by reference to the legal status of their relationship with the named insured and/or where a term of a contract requires the named insured to effect cover for that party.

A 'principal's extension' is a common feature of general liability policies which provide cover to a party who engages the named insured to perform work or provide services under a contract. Such extensions may provide narrow or broad based cover. In some instances, the cover will be limited to the vicarious liability of the principal arising from the actions of the named insured. In that case, the principal will usually be required to seek cover for its own negligence under its own policy. Other versions of this extension may operate where the named insured enters into a contract that requires them to take out cover for the principal. In that event, the principal may have an entitlement to claim under the policy for its own negligence.

Failure to effect insurance

If a party to a contract agrees to effect cover for the benefit of of another party but fails to have a policy which satisfies that requirement, they will be in breach of contract. The measure of damages for such a breach will be equivalent to the indemnity that would have been available under the policy that was intended to provide cover.

The other point to note in this context is that in Queensland, where a promise to effect insurance is made in a contract for the benefit of a non-contracting third party, that third party may still be entitled to enforce that promise for its benefit under the Property Law Act 1974 (Qld).

Parties who are entering into commercial contracts should therefore consider whether the insurance clauses trigger an entitlement to cover for their business partners under their policies, whether this is an intended consequence of the agreement and, if it is, that suitable cover exists to meet those obligations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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