You Should Always Have Contracts Checked for Insurance Compliance
When entering contracts for engineering projects, it’s easy to focus on the scope of work and timelines. However, a critical area that is often overlooked is the insurance compliance section.
Many engineering contracts impose specific insurance obligations that can have serious financial and legal consequences if not met.
Having your contracts checked for insurance compliance is essential to ensure that you are not agreeing to terms that could expose your business to significant risk.
Why Contractual Insurance Requirements Matter
Contracts often contain clauses that stipulate specific types of insurance, minimum coverage amounts, and additional insured or interested party requirements.
These clauses are designed to protect the client’s or contractor’s interests, but they can sometimes be overly stringent or create obligations that are difficult – or impossible – to meet.
Here are a few common insurance requirements found in contracts:
- Professional Indemnity Insurance: Many contracts require engineers to maintain professional indemnity insurance for a specific amount and for a certain period after the project ends (e.g., run-off cover).
- Public Liability Insurance: Contracts may also mandate public liability insurance to cover any injuries or property damage that occur on-site.
- Adding a Named Insured or Interested Party: As discussed in the previous article, contracts may require you to add the client or contractor as a named insured or interested party on your policy.
Common Issues Engineers May Face
- Unrealistic Insurance Limits: Some contracts may require insurance coverage limits that exceed what is typical for your business. For example, a small engineering firm might be asked to carry $10 million in professional indemnity cover, which could be excessive based on the scale of the project. Meeting these limits may require purchasing additional insurance, which could significantly increase costs.
- Broad Indemnity Clauses: Many contracts contain indemnity clauses that can expose you to liabilities beyond what your insurance will cover. These clauses may require you to indemnify the client for losses, even if their own negligence caused them.
- Extending Liability Beyond Project Completion: Some contracts require you to maintain insurance long after the project is complete through the use of run-off cover. While run-off cover is important for long-term protection, being contractually obligated to carry this coverage for extended periods can increase your long-term costs.
- Adding Additional Parties to Your Policy: As mentioned, contracts may require you to add the client as a named insured. This can expose your business to additional risks and may lead to higher premiums or reduced coverage.
Why You Should Always Have Contracts Reviewed
- Avoid Unnecessary Financial Burden: Contracts that require excessive insurance coverage or extended liability periods can create financial strain, especially for smaller firms. By having the contract reviewed, you can negotiate more reasonable terms that align with the size and scope of the project.
- Ensure Insurance Compliance: Not all insurance policies can meet the contractual requirements laid out by clients or contractors. For example, adding a named insured may conflict with your policy’s terms, or your policy may have exclusions that the contract doesn’t account for. A thorough review will ensure that your existing insurance can meet these obligations or highlight the need for additional coverage where required.
- Mitigate Legal Risks: Indemnity clauses or other legal obligations in contracts can expose you to risks that are not covered by your insurance. Having the contract checked by a legal advisor or insurance broker ensures that you’re not unknowingly agreeing to terms that could lead to costly disputes or claims.
- Tailored Insurance Solutions: After reviewing the contract, your insurance broker can help tailor your insurance solutions to meet the specific needs of the project. This might involve purchasing additional cover, adjusting policy limits, or negotiating contract terms to ensure compliance.
Insurance compliance is a critical part of any engineering contract. By ensuring that a legal advisor or insurance broker reviews your contracts, you can avoid agreeing to unrealistic insurance requirements, protect your business from unnecessary risks, and ensure that you are fully compliant with the contract’s terms.
At Engineer Insurance Australia, we specialise in helping engineers navigate complex contractual obligations. We can provide guidance on insurance requirements or facilitate contractual reviews to ensure your insurance policies meet your contractual needs.
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed insurance broker in order to assist you.
