Q: My new client has proposed a set-off provision for our contract. Is this an issue I should be concerned about?
A: A set-off provision typically allows your client to offset their own (real or potential) monetary claim against you by reducing their next payment to you. Some of our insureds prefer to strike provisions that allow their clients to withhold or setoff payment. Their thinking is that this helps to differentiate claims related to payment (which are typically uninsurable) from claims alleging negligence (which are typically insurable).
What is a Set-off Provision:
According to International Risk Management Institute, Inc a set-off or offset is an equitable right that allows parties to cancel or offset mutual debts to each other by asserting the amounts owed, subtracting one from the other, and paying only the balance. The right of set-off is readily available in insurance and reinsurance relationships, and, like all rights, it should be carefully planned for and built into the contractual relationship’s terms.
How do Set-offs impact reinsurance?
On www.irmi.com it states, “The right of setoff is used in day-to-day business transactions between reinsurers and reinsureds and their brokers in the form of standard net accounting. Balances due the reinsured for paid losses and earned premiums due from the reinsured to the reinsurer are netted out between the reinsured and its reinsurer or by the broker through the monthly or quarterly accounting reports. Besides net accounting, the right of setoff can be secured as an express contractual right, through state law, and by application of case law.”
Always consult with your Risk Manager or Lawyer before signing a contract if you are concerned about the set-off provision. The Risk Specialty Group offers free contract reviews for our clients in regards to risk management and insurability implications.
The Risk Specialty Group and RLI Design Professionals are pleased to feature our Contract Tip series. We’ll review a question submitted by a design firm relating to the subject of contracts. Keep in mind, though, that these discussions are general in nature and in making specific business decisions, it’s important to review your options with a knowledgeable attorney.