To get to grips with liability insurance you need a clear understanding of the difference between contractual liability and delictual liability. These legal terms for specific liability are also relevant to understanding the cover offered on insurance policies. Before I explain why, I will share the practical impact of these terms.
Negligent loss or damage
Delictual liability arises when someone negligently causes loss or damage to someone else or their property. Four key elements must be proved before the injured party can claim damages based on a delictual action, namely unlawfulness, causation, capacity and monetary loss. If someone drove their vehicle into your perimeter wall because they were not keeping a proper lookout, they would be liable for the damages to your wall based on delictual liability.
Contractual liability is not based on negligence or unlawfulness, but rather on a specific contract that a person has in place with another person or company, with specific terms and conditions. If one party breaches a term or condition in the contract, and that breach causes loss to the other party, there is a contractual liability to the damaged party. The following example was chosen to exclude coincident delictual damages.
A plumber who signs an installation contract with a client, agreeing to an R500 penalty for each day he is late on the completion date, is liable to pay the penalty regardless of what caused the delay. The penalty was agreed upon at the time of signing the contract. This is a classic case of contractual liability where there is no delictual liability. Another good example of this would be if one owned property and rented it out.
Blurring the liability lines
A landlord often includes a specific clause in a lease agreement to state that if the tenant has someone on their property, and that person is injured, the tenant will indemnify the landlord from all damages that may be incurred. The landlord could be sued in terms of delict but would then recover on the indemnity clause in the lease agreement, which would constitute a contractual liability. It is important to mitigate against both of these liabilities if one can.
The most effective way to achieve this is through good liability insurance. Most liability insurance policies provide cover against delictual liability, but may also contain an exclusion for losses incurred because of contractual liability unless there would have been delictual liability in the absence of the agreement. This is important to understand. There are only a few specific policies that cover liability arising from contracts, the most common being Contractors All Risks (CAR) policies. CAR provides cover to contractors and sub-contractors for damages and claims arising from the construction agreement.
Aside from CAR and legal assist policies, it is difficult to find cover for pure contractual liability. Contractual liability is not based on negligence and is, therefore, easier for underwriters to predict; but it often results from unfair contractual terms that are imposed by corporates and legalese agreements. Indemnity clauses create large liabilities that are difficult to quantify and may arise without any fault on the person’s part. Other examples would be breaches of divorce agreements or commercial trade agreements.
Seeking competent advice
From a risk management point of view, one needs to read agreements carefully, before signing, and refer the agreement to an attorney trained to pick up unfair contract clauses if deemed necessary. There is some consolation in that both the Consumer Protection Act and the Policyholder Protection Rules have requirements that agreements being signed by natural persons should be in plain language and easy to understand. It is possible to have offending clauses struck out, but one needs to know they will not be protected by their insurance policies where they attract liability through breaching agreements.