Businesses urged to review their liability risks in contracts

Service agreement contracts play the most important role in limiting a company’s exposure to liability risks. This according to Annelie Smith, Corporate Executive at RBS (Risk Benefit Solutions Pty Ltd), an authorised financial services provider, who says that businesses  entering into service agreements with third parties need to make sure that possible liability risks are addressed, and that they are assigned to a specific party.

“The simplest example of this is when a company is organising a public event. Multiple businesses, from caterers and sound technicians, to security companies, need to pull together to make an event work. When something goes wrong, or someone gets injured, there needs to be a very clear understanding over which company can be held liable for damages or negligence,” Smith says.

“If, for example, someone at the event is electrocuted by exposed speaker wires and the contract between the event organiser and the sound technician does not clearly state who bears the responsibility of making sure the wires are insulated throughout the venue, the event organiser could be held liable for any damages or settlements that may need to be paid,” she continues.

Smith adds that it has also become common practice that, especially companies that are involved in events, are required to have comprehensive liability cover in place. “If you take the City of Cape Town for instance, businesses are only allowed to hold public events if they have adequate liability cover in place before the event starts,” she says.

However liability is not limited to events, she adds. “In any agreement between a business and a service provider, it is vital to outline risks and responsibilities. If a manufacturer makes use of a logistics company, for instance, it needs to be clear exactly when the liability for damages or losses passes from the manufacturer to the logistics provider. Every service contract needs to be scrutinised for risks and liabilities.”

Smith explains that contracts also play a substantial role in the insurance cover that companies need. “Every new service contract needs to be approached as unique. When companies rely on off-the-shelf contracts, they often expose themselves to liability risks without knowing it. A broker will also be able to structure a company’s insurance policy around the stipulations in the contract,” she says.

“The sooner you involve your insurance broker in the process, the better. Brokers often spot risks and liabilities that their clients do not. Brokers can also negotiate with insurers in order to structure the best policies for their clients.”

“With businesses increasingly being held accountable for causing damages or losses, it is becoming crucial to ensure that their liabilities are explicitly defined, and covered by the correct policies before they initiate any service agreements,” Smith concludes.