Why You Should Pay Attention to Assumed Liabilities in Your Insurance

This article was co-authored with Lauren Spice, Managing Director at Morgan Insurance Brokers. 

Insurance contracts are always challenging. They’re obscure for outsiders and include so many layers of rights, obligations, extensions and exclusions that making sense of it all is difficult. You almost need a flowchart to understand which scenarios are covered – and, when negotiating with insurers, insured parties don’t always have strong bargaining positions.

One aspect of insurance contracts that doesn’t get the attention it deserves is assumed/accepted liabilities. Before you switch off, here’s why these devilish liabilities matter. Typically, insurance policies have a clause whereby the insurer will be under no obligation to compensate you if, in the course of your activity, you either:

• accept obligations that exceed what is legally expected of you
• waive the right to recover from another person.

These clauses are known as exclusions of assumed liability.

A very good example of the first scenario (obligations that exceed what is legally expected of you) is when you enter into a contract (let’s call it the ‘business contract’) that includes liquidated damages (instead of damages to be calculated when and if they are due). 

An example of the second scenario is when you reach a settlement to terminate a dispute without consent from your insurer. In those situations, your insurer is entitled to – and no doubt will – argue that, because you went over and above what is expected of you, it will not compensate you. As a result, you end up covering any related liabilities out of pocket rather than recovering from your insurer.

With the above in mind, courts do apply a ‘commercial interpretation’ to assumed liabilities. That means any exclusion of assumed liability (that is, your assumption of liability) needs to make sense in the context of the whole policy. In other words, an insurance policy is understood to cover whatever obligations are normally covered. So, unless your business contract has unusual obligations or wording that excludes a commercial interpretation, the insurer has less legitimacy to object to your claim for compensation.

At the end of the day, though, certain business transactions do require warranties that go over and above the normal obligations. For example, when you buy a business, you assume the liabilities of the seller, and negotiating an insurance policy that includes assumed liabilities is normal practice. 

The best way to prevent problems is to ask your insurance broker to negotiate an inclusion of assumed liabilities. Their understanding of insurance contracts and relationship with your insurer means they can help you negotiate a fair clause that covers you appropriately. For independent advice about your insurance contract and related commercial risks, contact our commercial law team.  

The content of this page is for information only. The content does not constitute legal advice and should not be relied upon as such. You should obtain advice that is specific to your circumstances before taking any action.