Legal: Protection for rainy days

Just as taking an umbrella on a sunny day seems to ensure that the rain stays away, brokers should consider using a limitation-of-liability clause to improve their risk management and protect them against the costly consequences of unfortunate events.

Traditionally, there has been some resistance by brokers and other professionals to including these clauses in their terms of business, the principle being that professionals should accept full responsibility for their actions.

Today, limitation-of-liability clauses are now common in lawyers' and accountants' terms of business, seen as a useful tool in allocating risks fairly in business relationships. Without a sensible limitation-of-liability clause, a job worth a few hundred pounds in fees, for example, could bankrupt a business if a small mistake were made.

The perception is that insurance brokers have been reluctant to introduce limitation-of-liability clauses into their terms of engagement. Whether this is because brokers do not think they need these clauses or are unsure how to use them is unclear. Either way, the British Insurance Brokers' Association has stepped in to assist with the fourth in its series of Professional Indemnity Initiative publications, entitled Facts about Limitation-of-Liability Clauses. Now brokers have a useful source of the key issues to consider.

One of the most important points is Biba's recommendation that brokers should seek specific legal advice before using a limitation-of-liability clause. You might think 'you would argue that as a lawyer', though it is mentioned in the knowledge that these are possibly the most perilous clauses to draft; even the most minor error in the drafting can cause the whole clause to have no legal effect.

For example, if the drafting is not absolutely clear then the clause will be interpreted against you when you try to rely on it. Also, if the clause accidentally excludes liability that cannot be limited by statute then the whole clause could be struck out. Further, in standard terms of business and consumer contracts, you must ensure that the allocation of risk is objectively fair. Also, for consumer contracts, you should use formal legal terms with caution, even if they are used to ensure precision in the drafting, because if consumers do not understand those terms then your clause will fail.

Brokers should not be put off adding in a limitation-of-liability clause into their terms of business. Having a clause drawn up professionally can be money well spent, just as a decent umbrella will not blow inside-out at the first gust but protect you from the rain for years to come.

Emma Bate, commercial partner, financial institutions group, Beachcroft.

Source: PB – June 2010