How can you reduce your liabilities?

Posted by 23 November, 2013 (0) Comment

This article is about liability, sometimes “called” indemnity, how to reduce it, why it is required and how do you work out what yours is? It’s a long one yet winning contracts with unclear liabilities can lead you to long unfulfilling journey.

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I’ve just won a contract!

 

We are called every week by people who make the above exclamation. It’s great when client win new contracts, they get so excited when they start working with one of the ‘big boys’. However these contracts are often weighted towards the bigger company in the “partnership” and have severely onerous terms and conditions. It will never cease to amaze me how many people sign a legal document without reading it, having a expert interpret it for them or seeking any form of legal advice. However it happens every week, I’ve even done it myself when there’s little at stake. Lesson learned! We now know enough solicitors to advise clients when the need arises. Solicitors have different specialisms and expertise and we try to help, or at least signpost, all the enquirers we hear from.

One of the most important contractual areas to negotiate upon is the level of liability you are being asked to carry. Many contracts have “boiler plate” wordings which have ridiculously high levels of insurance protection demanded from small companies as well as medium and large. The first point to negotiate on is the amount of protection they expect you have in place. This is because insurers will, typically, charge a rate for every £100 or every £1000 of cover that you require. A higher level of protection means an increased insurance investment, which might not match the new risks.

Demands for insurance documents

 

A lot of contracts state that “you must have insurance a, b or c”. Many business owners start looking as soon they read this, not realising that further on the contract will stipulate that the full insurance documentation must also be provided. So they contact an insurance provider and arrange cover quickly without checking how long the documents will take to arrive.  You will think insurance providers can issue documentation very quickly. This is not the case, some of them have several levels of check on their policy documentation before they are issued. Others prepare the documents in one country and issue them from another. Some only issue documentation online. Others seem like they’re still using pigeons that carried messages during WWII.

This doesn’t help when the people fulfilling the contract require payment. If a contract says you must have insurance a,b or c and documentation, you are unlikely to be paid until you have provided documentation. This has caught out people who either didn’t bother arranging insurance at the outset, yet told their client they had, or they arranged insurance with a provider that could not issue documentation promptly.

Businesses are not likely to go bust because they failed to arrange insurance. But not all insurance can be paid in monthly instalments, so cash flow needs to be managed.

How do I work out my liability?

 

The “boiler plate” contracts mentioned above have high limits because it is often difficult to estimate. Sometimes the actual amount of liability can only be determined following litigation because claims become so complicated. Not all contracts ask for annual insurance. Some I have seen have insisted that insurance is arranged and then maintained for 12 years after the project was completed. This protected the large company against issues that arose later in the day. It is a contractual requirement and there is not much use accepting a contract for £144k income, if the insurance premium is £12k and you are required to keep it in force for 12 years. Some companies have accepted these terms because they were so confident that they would continue to get business from the company they just started to work with. Not all businesses survive taking this type of risk.

We have developed a method that helps us understand the liability businesses are asked about and they, with the help of their legal team, negotiate what they can reasonably reduce it to.  As a business owner, I like to have advisers who can answer unusual questions when the need arises. It reduces my liability when they help with the things I know that I don’t know.

Wrap up: Winning contacts is great as long as you understand the liabilities that they bring into your World. Don’t sign anything until you have read everything, I know that it isn’t easy. Ask for help with interpretation of things you don’t really get and ensure you understand exactly what you are getting into by signing on the dotted line.

Top Tip: It’s very rare that people make mistakes when delivering contracts. The most common issues are when people allege something has gone wrong, hide a mistake, fails to own up to their own error or vindictively blame people  they have fallen out with. The blame culture isn’t a new phenomenon, yet it is here to stay.

Categories : Business Insurance,Company Insurance,Contractors Insurance,Liability Insurance,Personal Insurance,Uncategorized Tags : , , , , , , , , , , , , , ,

What is the difference between indemnity and liability?

Posted by 26 October, 2013 (0) Comment

This article is about indemnities and liabilities, why they are often confused and what you can do about it.  I’ve lost count of the number of times people have contacted me, initially requesting an indemnity protection, and it transpired that it would never have done what they wanted it to.

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What is an indemnity?

 

Rather than getting technical I am trying to put this in layman’s terms. I am giving advice to people on how to reduce risks, arrange insurance policies and get them to pay out when the business needs them to, or defend the business. So if someone asks me to arrange protection for a hotel which would costs £3.6 million to rebuild, they expect me to get the insurance company to pay out if a fire breaks out.

If I fail in my professional duty to provide the protection they requested, I have no doubt that they would take legal action against me, and rightly so. The cover I have is called an indemnity and its designed to maintain my financial position even if I do make an error and something terrible happens as an consequence. That is the principle, putting me back in the position I was in before the error occurred by covering the financial loss. Loss of reputation is another issue and there are many ways of handling that hot potato.

What is a liability?

 

A liability, in layman’s terms, is more of a legal responsibility rather than a professional one. Companies are liable for the cost of compensation for employees who are injured at work. Naturally, people that undertake construction projects (or other outdoor work) are liable to members of the public if they cause damage, an injury or an illness. Read about the Jaguar car that was melted by a new building in London.

Some miscreants think they can buy the cheapest liability protection on the market, rather than one that is fit for purpose, and if someone is injured or becomes unwell because of their negligence, they will simply close their businesses. One gentlemen told me he would “pack up and go home”. Little did they know that they are also liable as directors and I would certainly have no qualms about talking to the director of a company that hadn’t adequately protected loved ones in a working or public environment.

If they have not taking care of their own insurance, they might have to sell their own assets in order to pay for someone else’s long term care. It is enshrined in UK law that the person causing an injury or an illness is “liable” for the cost of compensating the injured party. This is an incredibly rare occurrence so rates are low.

Iamconfused.com

 

With so many people doing research on Google its not surprising there are a trillion opinions about what is right for each business. The only real way to assess whether a liability cover should be preferred to an indemnity is by thinking about who is likely to take action against an entity and why would they even think about doing so. Think about near misses that have happened, check your accident book or your complaint register, or ask your customer service team what the closest calls were.

Once you have done that speak to a lawyer and find out how much it would cost to defend allegations because you will not want to pay out willy nilly and become a target for spurious claimant or professional claim management companies. They have no qualms about targeting a business that have been quick to make a settlement in the past. Once a lawyer has identified the possible defence cost and likely compensation awards based on recent “case history”,  you’ll be in the position to assess whether you need protection and what type is going to be the best fit.

Wrap Up: Indemnities and liabilities are like widgets to the man in the street. How do you know the difference between the two until you have compared them? Professional indemnity is compulsory for some professions in the UK, including mine, tune in next time for some examples.

Top Tip: Do not rely on your terms and conditions to protect your cashflow. They will possibly reduce the amount you end up paying or losing to someone with limited legal resources. They are of little use when someone with unlimited legal funds has got really upset and is gunning for you or becomes insolvent and runs from you.

 

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