When a Contract Creates an Unexpected Risk

Imagine a mid-sized facilities management company in Dubai that wins a three-year services contract with a property developer. The commercial terms are agreed quickly, and legal review concentrates on payment terms and service levels. Deep in a schedule that few people read closely sits an insurance clause. It requires the company to indemnify the developer against all third-party claims connected with the services, to maintain public liability cover at a stated minimum limit, and to name the developer as an additional insured.

The contract is signed. Eighteen months later, a visitor is injured in a common area and the developer asks for confirmation of cover. Only then does the company discover that its policy limit is lower than the contract requires, and that the indemnity it accepted may be wider than its policy was designed to respond to.

This scenario is illustrative, but the pattern is familiar. A contract is a set of promises, and an insurance policy is a separate set of promises with its own limits, conditions and exclusions. When the two are not read side by side, the difference between them lands on the company’s own balance sheet. That is why contractual risk management deserves the same attention as pricing and delivery.

How Contractual Obligations Create Exposure

Most commercial agreements move risk from one party to another through a handful of recurring provisions:

• Indemnity and hold-harmless clauses. These require one party to compensate the other for specified losses or claims, sometimes including those partly caused by the other party.
• Limits of liability. A cap can protect a business, but it may be missing, set very high, or subject to carve-outs that remove the protection for certain types of loss.
• Insurance requirements. Clients and project owners often specify the types of cover, minimum limits, maximum deductibles and how long cover must be maintained.
• Additional insured status. Where required, the client asks to be added to your policy. This generally needs to be agreed with the insurer and reflected in the policy documents.
• Waivers of subrogation. These stop your insurer from pursuing the other party to recover what it has paid on a claim. Insurers usually need to know about them in advance.
• Responsibility for subcontractors, suppliers and third parties. Contracts frequently make the main party answerable for the acts or omissions of others, which may not match what its own policy covers.

Contractual liability is not automatically insured in every circumstance. Whether a policy responds depends on the contract wording, the policy terms and exclusions, the nature of the loss and the governing law. Businesses should take legal advice on how these clauses are likely to be interpreted, including under UAE law where it applies.

Why Existing Insurance May Not Be Enough

Holding an insurance policy and confirming that it responds to a specific contractual obligation are two different things. A programme arranged for ordinary trading can look comprehensive until it is tested against a particular agreement. Typical points of misalignment include:

• Limits. The policy limit may be lower than the contract requires, or it may be shared across several claims within the policy period.
• Exclusions. Some policies restrict or exclude liability assumed under a contract beyond what would exist in law anyway.
• Insured activities. Cover is tied to the business activities declared to the insurer, so a new service line may sit outside it.
• Territorial scope. A policy may be limited to certain locations, or may not respond to work performed or claims brought elsewhere.
• Conditions. Notification requirements, deductibles, the basis on which the policy is written and rules around subcontractors can all affect whether a claim is paid.

A certificate of insurance shows that a policy exists, but it rarely tells the whole story. The wording is what counts.

Practical Examples of Potential Insurance Gaps

The following examples are hypothetical and are included only to show how gaps can arise.

Example 1: Liability requirements above existing limits

A contractor bids for a fit-out project in the UAE. The contract requires third-party liability cover at a higher limit than the contractor currently carries, and the contractor assumes this can be arranged after award. If the higher limit cannot be placed on acceptable terms, or the project starts before it is in place, the contractor may be in breach of contract, and any loss above its existing limit could fall on the business directly.

Example 2: An indemnity given without reviewing liability cover

An IT services provider agrees to indemnify a client for any and all losses arising from its services. Its professional indemnity policy may be written to respond to negligence, while the indemnity could reach losses that arise without negligence or fall into categories the policy excludes. Whether a gap exists depends on both documents being read together.

Example 3: A cross-border agreement

A UAE-based company signs a supply and installation agreement with a customer in another GCC country. Its insurance programme was arranged with UAE operations in mind. Questions then arise about whether the policy territory extends to the work, whether local insurance is required, and how a claim would be handled across jurisdictions.

In each case the outcome depends on the precise wording and the circumstances. None of these examples suggests that a particular policy will, or will not, respond.

How Businesses Can Review Contracts Before Signing

A short, consistent checklist helps surface problems while there is still time to negotiate:

1. Identify the insurance obligations. Check the main body, schedules and appendices, not only the clause headed insurance.
2. Compare required limits with existing policies. Look at per-claim and annual limits, and at deductibles.
3. Review indemnities and liability caps. Watch for broad wording, uncapped liability and carve-outs from any cap.
4. Check exclusions and conditions. Read the policy wording, not just the schedule or certificate.
5. Confirm territorial and jurisdictional scope. Make sure the policy covers where the work is done and where claims could be brought.
6. Review subcontractor and supplier responsibilities. Confirm what insurance they must carry and whether their obligations match yours.
7. Involve the right people. Bring in legal, risk management and insurance professionals where the value or complexity justifies it.

For larger or more complex agreements, some businesses commission a formal contractual risk review, in which the contract terms are mapped against existing policies before signature. This does not replace legal advice, but it gives decision-makers a clearer view of what is and is not insured.

The Role of Insurance Risk Advisory

A structured business risk assessment looks at what a company has promised, what could go wrong, and how those exposures are currently insured or retained. An insurance gap analysis then compares those commitments with the policies in force and highlights where limits, exclusions or conditions fall short. The findings usually fall into three groups: gaps that can be closed by adjusting the programme, obligations that should be renegotiated before signing, and risks the business knowingly chooses to retain.

This work often forms part of wider insurance risk advisory or risk management consulting services, and it can sit alongside an insurance programme review at renewal. Its value lies in timing. Findings are most useful before a company accepts new obligations, while there is still room to negotiate the wording or arrange additional cover.

Not every contractual liability can be insured. Some must be negotiated out of the contract and others retained deliberately, a decision that belongs to the business and its legal counsel.

Building a Repeatable Contract Review Process

Consistency matters more than any single review. A simple process might include:

• Clear triggers. Decide which contracts need an insurance check, for example by value, client type, sector or unusual terms.
• The right participants. Involve legal, procurement, finance, operations and the insurance broker in UAE early, not after signature.
• A central record. Log required limits, policy types, additional insured and waiver requirements, and expiry dates for each contract.
• Escalation of unusual clauses. Uncapped liability, broad indemnities and waivers of subrogation should go to someone with authority to question them.
• Regular revisits. Review cover when operations, locations, subcontractors or contract terms change, and ahead of each renewal.

Review the Risk Before Accepting the Obligation

Contracts and insurance policies are usually negotiated by different people, at different times, for different purposes. The gap between them is where unexpected exposure tends to sit.

Identifying potential gaps early costs far less than discovering them during a dispute or claim. Businesses that treat contractual risk management as part of everyday contract practice are better placed to accept obligations with their eyes open, and to know when to negotiate, adjust their cover or walk away.