An important aspect of reducing risk is assessing the commercial terms of the contracts that the agency signs. These will include the trading contracts signed with clients and contractors as well as contracts with suppliers. It is vital that every agency is fully aware of rights, obligations and restrictions contained in commercial contracts. This requires checking which terms are absolute obligations, which terms require the agency to use its reasonable endeavours and which terms require using best endeavours. There are important legal distinctions and being aware of these will be an important part of a strategy to minimise liabilities.
Another point to be aware of is the difference between signing a contract with a client to supply a contractor to perform services and signing a contract to directly perform services. Different liabilities will arise under each form of contract and standard Professional Indemnity (PI) insurance taken out by most agencies will not usually cover the agency for actual performance of the work.
Professional Indemnity
The PI policy relates to claims made under the core business activity of the agency. In recent weeks we have heard reports of agency PI premiums rising by as much as 700% from last year and in some cases agencies have not been able to obtain a renewal. No doubt the effects of September 11th will have had a major impact on all insurance business but such a rise is phenomenal none-the-less.
An important consideration for insurers when determining the PI premium for a recruitment agency is the terms under which the agency contracts with its clients and its contractors and temporary workers. Agencies have some measure of protection from PI claims by correctly using appropriate forms of contract and this will provide a first line of defence against claims.
One of the problems that we have found with standard agency PI policies is that the policy contains an absolute warranty that the agency will contract upon its own terms or those endorsed by the insurer or a recognised industry body. In an ideal world an agency would be able to execute its own form of contract with every client but in some sectors the client insists on preferred supplier agencies signing the client’s standard terms. Unless the insurer endorses each client’s terms the policy will not cover liabilities under those contracts.
In order to reduce premiums and exposure to risk, agencies should carefully consider both their own terms and the terms they are asked to sign with clients and also the terms of their insurance policy. We have seen contracts that purport to exclude all liability for the agency but in actual fact the relevant clause or clauses are invalid or unenforceable due to poor contract drafting. If the Courts decide to strike the liability clause from an agreement then the agency could be faced with unlimited liability. In the event of a claim the insurers would only pay out up to the agreed limit of cover and may try to avoid paying out at all.
Another method of transferring risk is to mirror the indemnity and liability provisions contained in a client’s contract in the agency’s contract with a contractor. However, it is also critical to ensure that the contractor has adequate PI insurance throughout the period of the contract to cover potential liabilities.
Uninsurable risk
In addition to risks that can be covered by PI insurance an agency may be faced with risks that are uninsurable and should therefore be avoided. An example could be the opportunity to obtain new business with a prospective client subject to agreeing to onerous contract terms. We have seen examples of client supply contracts that contain terms requiring the agency to fully indemnify the client in the event of sex, race or disability discrimination by the client. This is an uninsurable risk, as it is against public policy, and there is no limit to a potential claim. In such a case if the client will not renegotiate the term it could be best to avoid signing the contract, on the basis that the risk is too great and the agency is not in any position to minimise its exposure. It is possible that the clause could be struck out by the Courts under the Unfair Contract Terms Act 1988 but it would be dangerous to rely on such an interpretation.
Conclusion
The best way to ensure that an agency is adequately protected is to implement an effective risk management strategy to address the issues highlighted. Although it may be tempting to accept new business on any terms offered, decisions made with a comprehensive understanding of the risk, after a proper assessment of liability and cover, could pay dividends. An effective risk management policy will also appeal to underwriters who should be able to offer more competitive premiums.
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