Liability waivers require risk management input

CHICAGO – Liability waivers and other exculpatory clauses in contracts can offer significant protections for companies, but they require clear communication between risk managers and legal teams to ensure they reflect operational risks and insurance provisions, a panel of experts said.

To be effective, the clauses should be clear and easily understood by all the parties involved, they said Wednesday during a session at Riskworld, the annual conference of the Risk & Insurance Management Society Inc.

Exculpatory clauses take many forms – liability waivers, release clauses, limitations of liability, disclaimers – and they all do similar things but vary to different degrees and apply to various contexts, said John G. Koch, shareholder and deputy general counsel at Flaster Greenberg P.C. in Philadelphia.

“It narrows or reduces liability for a defined risk or harm or liability,” he said.

They can include monetary caps, limit the scope of liability, or designate an exclusive remedy, Mr. Koch said.

Risk managers are often asked to review the insurance elements in contracts, but they should take a wider view and ensure that exculpatory clauses are appropriate for the risks they are intended to limit, said John J. Marren, Philadelphia-based senior director, insurance and risk management, at BeOne Medicines USA Inc.

Risk managers need to understand what services the third parties are providing, how critical the services are, whether another contractor could perform them, and what insurance provisions are necessary, he said.

“It’s incumbent upon us as risk managers to give that view back to them, so that not only the lawyers learn from it, but the business folks understand what we’re trying to do,” Mr. Marren said.

The clauses should reflect the insurance requirements of the contracts, Mr. Koch said. For example, a clause may limit the liability of a consultant to the value of work performed, which could be in the thousands of dollars, but the consultant may also be required to retain professional liability coverage in the millions of dollars, he said.

The contract should reflect the coverage limit the contractor must buy, Mr. Koch said.

All exculpatory clauses should define the risk of harm and the liability to be waived, conspicuously warn of the risk being undertaken, and acknowledge the assumption of the risk by the other party in the contract, he said.