The effect of insurance on exclusion clauses

Managing where risk should sit is a key part in any commercial negotiation. A party will seek to rely upon an exclusion clause when it does not want to be liable for a certain identified risk.  

Such exclusion clauses can be challenged as being unenforceable if they are not considered reasonable according to the Unfair Contract Terms Act 1999 (UCTA). UCTA cites that the availability of insurance for the party taking on the contractual risk is a relevant factor in assessing whether or not the exclusion of liability is reasonable. A Court of Appeal case, Goodlife Foods Ltd v Hall Fire Protection Limited [1], has offered recent guidance on how the availability of insurance should be interpreted in light of UCTA.

Goodlife Foods Ltd (Goodlife) employed Hall Fire Protection Limited (Hall Fire) to install automatic fire sprinkler systems in their frozen food factory. The parties used Hall Fire’s standard conditions, which had an exclusion of liability for indirect and consequential loss. Hall Fire’s conditions also included an option to insure the excluded loss on behalf of Goodlife, with the cost of such insurance then to be added to the tender price. The relevant clause is set out below:

“We exclude all liability, loss, damages or expense consequential or otherwise caused to your property, goods, persons or the like, directly or indirectly resulting from our negligence or delay or failure or malfunction of the systems or components provided…As an alternative to our basic tender, we can provide insurance to cover the above risks. Please ask for the extra cost of the provision of this cover if required.”

Goodlife already carried insurance for property damage and business disruption and therefore did not ask Hall Fire to provide this additional insurance. Following a fire and a claim by Goodlife, Hall Fire relied upon their exclusion for indirect and consequential loss, which Goodlife then challenged as unreasonable. Goodlife claimed that its own insurance should not be relevant when assessing reasonableness, as Hall Fire had also offered to insure this risk. Goodlife said the availability of insurance was a neutral factor in the dispute.

Lord Justice Coulson regarded the point on insurance to be “at the heart of the reasonableness issue in this case”. He concluded that it was reasonable for the risk of indirect and consequential loss to sit with Goodlife, as their knowledge of their business meant that they were best placed to insure their premises against the risk of fire. The fact that Hall Fire also offered to provide this insurance at an additional cost did not detract from the reasonableness of the exclusion clause.

This case is significant because it deals with a situation where either party was in a potential position to insure the relevant loss. If either party has the ability to insure, then this will not detract from the reasonableness of one party to exclude or limit liability. The parties will remain free to apportion risks and obligations as they see fit. Whilst all exclusion clauses have to be considered in their factual and contractual context, this is another case pointing to the enforceability of exclusion clauses. Limitations on liability will continue to remain a hot topic in negotiations and must be given full consideration.

[1] Goodlife Foods Limited v Hall Fire Protection Limited [2018] EWCA Civ 1371, 2018 WL 03012103