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Insurers may find that the wording in their public liability policies has them unknowingly covering a principal’s own negligence.

Principal’s liability cover is designed to protect the principal against any liability for property damage or personal injury that arises when a supplier provides goods or services to the principal under a contract.

It's never intended to cover a principal’s own liabilities.

In a recent case, the court found that GIO had agreed to insure the principal for its own legal liabilities under a policy insuring the supplier, even though the loss was not caused or contributed to by the supplier. In this case the contract with the principal required the supplier to:

  • hold the principal harmless for losses arising out of the supplier’s negligent acts or omissions (except to the extent that they were caused by the principal); and
  • purchase insurance that insured the principal for its respective rights and liabilities including liability to the supplier and any third parties to the same extent as if the principal and supplier each had a separate policy of insurance.

The court concluded that the insurance clause should be considered separately to the indemnity and the words in the principal’s liability cover in the policy meant GIO had agreed to insure the principal for its own liabilities without knowing the specifics of what the contract said. The principal’s liability cover in GIO’s policy is commonly used across the industry, which is why insurers are sitting up to take note.

What we don’t want to see is the industry become gun-shy about providing principal’s liability cover.

A knee-jerk reaction could result in the loss of contracts and business for suppliers, so insurers should look to modify the principal's liability cover in their policies if it is too extensive.

A middle ground where suppliers can still get principal’s liability cover for when their work has caused loss or they have been negligent is the best outcome. If this is done, everyone will have a better understanding of precisely what is covered.

The GIO case is a reminder of the importance of checking exactly what is covered under a policy, along with the contractual requirements for the supplier. Principal's liability cover can differ from insurer to insurer so brokers need to assess the different types of principal’s liability cover available to see which is best suited for their client.

The Fold's Contract Review Service can also assist brokers and their clients by advising on specific contract terms and insurance policies.

If you have any concerns about any of these issues, please contact us.

Author: Charmian Holmes

August 2014

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