Effective risk management is crucial to businesses of all
sizes and is no less important to a recruitment agency when the market
is in a downturn. It may be tempting to ignore risk when the times are
tough but storing up potentially dangerous liabilities could prove
costly in the long term.
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.
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.
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.
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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