Clients should conclude and read contracts

In the sphere of public liability – slip and trips, injury or damage to property - often arises from outsourced services or service providers.
Most retail companies may enter into service level agreements (SLAs) with external parties such as cleaning companies, security companies and trolley service management companies. These service providers are often in the midst of liability claims, as either the primary cause thereof, or a contributing factor.

Written contracts are preferred

So, how does this effect the insurance landscape and who bears responsibility? Much may depend on the contract between the client and its service provider.
For practical and commercial reasons, larger retail clients do not operate independently. They rely on external service providers to provide certain key services. These service providers are appointed on a contract basis. Regrettably, we still find cases where service providers have been appointed on the basis of, for example, a handshake. Findings in the Professional Indemnity section of SHA’s 2020 Annual Risk Review survey revealed that 18% of respondents surveyed do not enter into formal contracts This is quite problematic at claims stage, and when there has been a serious injury to a member of the public.
Written contracts are preferred, as they provide certainty as to what has been agreed upon, which is essentially binding on the parties involved. On that note, insured clients should take care that they are not confined by indemnities issued in favor of their own service providers.

Who is liable?

A grocery store, for example, enters into a service level agreement with a cleaning company, for the provision of cleaning services. On a particular day, the cleaners omit to clear the floor surface of some spillage which causes a third party to slip and fall, sustaining bodily injuries. Who is liable?
Courts have expressed in numerous judgments that if the insured outsources its cleaning duties to a reasonably suitable service provider, then the grocer should be able to avoid liability to the third party. The cleaning company would be liable, as there seems to be negligence on their part in failing to fulfil their duties. The issue may be quite costly to defend, and the contract will prove invaluable to ascertain who carries the cost of these types of claims between the grocer and its cleaning company. Insurers will also have interest in what types of agreements are being concluded, as this ultimately informs premiums and deductibles.
An insured may have some difficulty when a claim arises to defer such a claim if the underlying contract is poorly drafted, or not drafted in their favor. In many of the agreements that we have come across, they do not contain the necessary insurance/indemnity clause which aims to safeguard the interests of the insured.

Brokers should advise their insureds

Thus, when procuring insurance policies or during renewal, brokers should encourage their clients to ensure that they have entered into written contracts with their service providers, and that these contracts contain the necessary insurance/indemnity clause in their favor, and not the contrary. There is also the very real risk that the insured could inadvertently prejudice the insurer if they have failed to, for example, timeously report a claim to the service provider in terms of the contract – thereby invalidating their right to defer the claim to the service provider.
Lastly, to ensure successful mitigation of risk, brokers should advise their insureds to employ a risk manager or designate a responsible manager who understands the risks inherent to the insured, and its obligations both to the insurer and to its service providers. Failure to have a risk manager in charge of these issues will result in the insured having to unnecessarily pick up claims, even when no liability could be attached to them. Regrettably, these costs will go against their claim’s history, which will unfortunately have an adverse impact on their risk profile.

Bonginkosi Ntuli

Claims Specialist - Professional Indemnity and Liability Claims