global insurance management

Limitation of Liability

Oct 19 2011

Limitation of Liability

Relevance:                   All firms.

Action required:           Check wholesale TOBA clauses that seek to limit liability

We have started to see clauses in wholesale broker Terms of Business Agreements (TOBAs) that seek to limit the wholesaler’s liability under the contract.

This follows the publication In April 2010, of the British Insurance Brokers’ Association (BIBA) ‘Facts about limitation of liability’, which aimed to:

  • clarify the issue of limitation of liability for brokers when advising clients; and
  • help brokers to manage their financial risk and ensure that it is proportionate to client engagement.

The BIBA document only acts as a guide and makes constant reference to the need for firms to seek independent legal advice when drawing up TOBAs. 

In the matter of “Limitation of liability”, it suggests that firms may seek to exclude or limit the extent of potential liability in one of three ways or a combination of all, such as:

  • restricting the type of wrongdoing (breach of contract, negligence etc.);
  • restricting the types of losses (direct losses, consequential losses, property damage, data etc);
  • applying a financial cap.

The broker to broker TOBA recently seen seeks to limit liability by restricting the type of loss and placing a financial cap. It states that:

“… (the wholesaler) will not be liable to the Broker for any direct or indirect losses, damages or costs or expenses incurred or suffered by you as a result of or in connection with any service that we provide to you hereunder unless arising directly from our negligence, wilful default or fraud….”; and

“… if you suffer or incur losses, damages, costs or expenses as a result of or in connection with any service that we provide to you hereunder otherwise than as a result of our wilful default or fraud, you agree that our total liability to you for such losses shall not exceed £5 million.”

Therefore, the wholesale broker is restricting its liability for negligence to £5 million.

You need to watch out for such limitations as they increase your exposure (as you could end up carrying the can when a client is suffers an uninsured loss as a result of the wholesaler’s negligence). In the example quoted, the £5m limit needs to be considered when placing business via the wholesaler.

This limit does not seem too bad but we have also seen an example where the wholesaler had limited its liability to £1m.

The follow up to this is whether your client ‘Terms of Business’ should limit your liability in this way. There is no right or wrong answer; it will depend on individual circumstances.  However, any firm considering introducing clauses that seek to limit liability MUST take their own independent legal advice.

You also need to be aware that consumers and commercial clients may need to be subject to different TOBAs as consumers may have greater protection from any attempted limitation. 

There are a number of questions firms should consider:

  • How would a limitation fit with treating customers fairly?
  • How reasonable is it to include a limitation?
  • How strongly should I draw the client’s attention to the clause?
  • Will the client understand the clause and its implications?
  • What response will I give to any specific questions from clients on the limitation clause?
  • Am I prepared to suffer a loss of business over the limitation issue (if your competitors use it against you)?

Indications from case studies suggest that the enforceability of the particular clause will be assessed as at the time the contract was made and not when a claim occurs and that the burden of proving the clause is “reasonable” will lie with you.

In conclusion

Firstly, we recommend that firms be vigilant to the introduction of Limitations of Liability in any TOBA issued to them.

Secondly, if consideration is being given to introducing such clauses into client terms of business, then firms must take suitable and relevant legal advice.

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