Home › Forums › Australian Financial Services Licensing (AFSL) Forum › Be wary of contractual limitations in your third party contracts
July 26, 2011 at 10:39 am #2377
Many AFSL holders have entered into various contractual agreements with third parties, whether it be custodian, share registry, administrator, responsible entity, law firm, accounting firms etc. Sometimes these contracts limit liability. In other words, the third party seeks to minimise their own exposure by capping their liability if things go wrong. This might be a strict dollar amount or a percentage or multiple of fees paid.
There are several reasons why this might happen, but probably involves some combination of negotiating power; lack of choice; lack of awareness etc.
All of this has implications for you. If something goes wrong and you need to sue the third party, the ability to recover is restricted. This has critical implications when it comes to insurance. Without exception every insurance policy expressly prohibits a client from restricting your/the Insurers ability to recover a loss. The clause may say something like
“The Insurer shall be subrogated to all the Insured’s, Plans’ and Funds’ rights of recovery, contribution and indemnity before or after any payment under this policy. The Insureds and Funds shall do nothing to prejudice such rights”
In the event of a claim against you (for which you may not be at fault) you can be left holding the uninsured loss. You can’t recover from the third party (because you signed the contract) and you can’t recover from the Insurer (because you breached your policy condition). My advice is:
- Review your contracts with third party suppliers
- Seek to remove any restrictions on your right to recover/sue
- If they can’t be removed (and this can be difficult/impossible at times), then be aware that in this specific case you may have an uninsured risk.
- Approach your Insurer and ask them to ‘waive their rights’. This is not easy to do but it’s worth attempting.