Before any policy responds, a project's risk has already been allocated once, by the works contract. Transfer clauses do a considerable and silent job there: an indemnity clause places on one party the consequences of a given event, a limitation of liability clause caps what the other will ever be able to claim, an exclusion clause removes certain heads of loss. Those provisions are negotiated by contract lawyers, often months before the insurance program is placed, and they decide who will carry what well before an insurer is consulted.
The link between the two layers is simple to state and constantly missed: insurance covers a liability, it does not create one and does not remove one. A party that has accepted by contract a burden it would not have borne under general law really carries it, and its insurer will follow only if its policy covers contractually assumed liabilities, which is an extension and not the default regime. Conversely, a party protected by a contractual cap will not be pursued beyond it, and the insurance it bought for that share then covers a risk it no longer runs.
Liability policies handle this through a clause whose name varies and whose effect does not: they exclude, or sub-limit, liability assumed by contract beyond what would flow from general law. The insurer's logic is clear: it rated a legal exposure, defined by rules it knows, and not the undertaking its insured may sign tomorrow with a powerful project owner. The consequence is that the widest contractual protection can come with the narrowest cover, and that the works contract and the policy then say two different things about the same situation.
The reverse direction produces a symmetrical effect, more rarely noticed. A limitation of liability clause, or a mutual waiver of recourse, reduces what one party can claim from another. It therefore also reduces what the first party's insurer can recover by subrogation, since one is subrogated only into the rights one finds. A waiver signed after the program is placed thus diminishes the contract's value with nobody having decided anything on the insurance side, and most policies for that reason require prior notification of any waiver, a requirement almost systematically forgotten.
It must then be known that these clauses do not always hold, and that their solidity depends on the applicable law more than on their drafting. Under French law, a clause depriving the debtor's essential obligation of its substance is deemed unwritten, which sets an upper limit on token caps; and no limitation operates in cases of gross or willful fault. A liability cap set at one percent of the contract value therefore stands a good chance of being set aside by a judge, which is good news for the project owner and very bad news for the contractor that built its insurance plan around that cap.
That uncertainty has a practical consequence that must be seen clearly. A party relying on a contractual cap to avoid buying cover beyond it finds itself, if the cap falls, exposed without limit and without insurance at the same time. The two protections are not independent: they leaned on one another, and they fall together. It is the same structure as the one described in the module on natural events, where contractual relief and insurance cover can vanish in a single movement, and it is a configuration to recognize because it recurs.
The useful reading therefore consists of putting the two texts side by side, which is almost never done because they belong to two different departments. One takes the contract's transfer clauses one by one, and for each asks: is this burden assumed by contract beyond general law, and if so does the policy follow it; does this limitation reduce a recourse my insurer needed, and did I notify it; and if a judge set this cap aside, what would be left. Three questions per clause, half a day for a contract, at a time when both texts can still be changed. After signature, all that remains is to hope the two said the same thing.
A main contractor signs a 210 million euro contract containing three transfer clauses. It indemnifies the project owner against any consequence of damage to adjoining property, including without fault on its part. Its total liability is capped at 3% of the contract value, that is 6.3 million. Finally, both parties mutually waive recourse for property damage covered by the project's single policy, a waiver signed in January, six months after the program was placed and without notification to the insurer. In March, dewatering damages three neighboring buildings to the tune of 14 million euros, with no fault established against the contractor. The contractor's liability policy excludes liability assumed by contract beyond general law. Where does the contractor stand?
Three clauses, three effects, and they do not operate in the same direction. The indemnity clause makes the contractor carry a burden it would not have had: without fault, its general-law liability toward the neighbors exists through abnormal neighborhood disturbance, but the undertaking to indemnify the project owner against ANY consequence goes beyond that. Yet its policy excludes precisely the contractual excess: it will follow the share corresponding to general law and not the rest, and that is the first piece of bad news here, the expected one. The second is more interesting. The 6.3 million cap, on which the contractor built its plan, protects it only if a judge upholds it: 3% of the contract is not token, so it stands a chance, but it will not hold if gross fault is established, and poorly controlled dewatering is exactly the ground on which that characterization is argued. If the cap falls, the contractor is exposed to 14 million with a policy that follows only part of it: both protections collapse together because they were leaning on one another. The third clause is the one nobody looks at: the waiver signed in January, unnotified, reduced what the contractor's insurer could recover, and most policies make that a notification obligation. The non-obvious point is that those three clauses were negotiated by a department that did not read the policy, and the policy bought by a department that had not read the contract, each having done its own job correctly.
- 01Insurance covers a liability, it neither creates nor removes one: a burden assumed by contract beyond general law is really carried, and followed only if the policy carries the extension.
- 02Liability policies exclude or sub-limit contractually assumed liability: the widest contractual protection can come with the narrowest cover.
- 03A waiver of recourse reduces what the insurer will recover by subrogation: most policies require prior notification of it, a requirement almost systematically forgotten.
- 04A liability cap does not always hold: it is set aside if it deprives the essential obligation of its substance, and it does not operate in cases of gross or willful fault.
- 05Contractual cap and insurance program lean on one another: when the cap falls, exposure becomes unlimited at the very moment cover turns out to be too short.