What is an ex Gratia Payment

Ex-gratia payments are made without legal acknowledgement of fault or liability. These types of payments are used in lieu of financial settlements that imply wrongdoing or contractual responsibility. The reasoning behind ex-gratia payments is by not admitting fault or wrongdoing, a defending litigant, accused or contractually obliged entity can avoid higher costs arising out of acknowledgement of responsibility, or fault.

In the insurance industry, ex-gratia payments may be assessed retroactively through legal process, or preemptively to bypass lawsuit, or additional financial obligations. If a company is not insured for particular liabilities, it may be to its advantage to issue ex-gratia payment in instance of undue hardship or circumstances beyond reasonable control of contractors. For example, irrespective of whether or not a business is insured for particular hardship of a contractor, according to Dr. Chundana Jayalath, a Chartered Quantity Surveryor, ex-gratia payments may be offered to contractors experiencing unforeseen adversity to avoid escalating costs.

In some circumstance ex-gratia payments may be simpler than others. For example, when elaborate insurance contract terms become involved, the possibility of misinterpretation of rights and responsibilities may arise. According to Robert M. Hall, a consulting lawyer and reinsurance expert, reinsurance companies may sometimes want to more closely examine their insurance settlements as ex-gratia payments may be unknowingly made under terms of contract.  

The reason for Hall’s comments are due in part to renegotiation of insurance terms. In insurance, risk from insurance polices may be diversified by selling policies to reinsurers. Since an insurance settlement involves acknowledging contractual obligation to compensate the insured if the terms require such, a reinsurer is essentially agreeing to those responsibilities. However, in legal cases discussed by Hall, insurance terms that were re-negotiated did not warrant settlement making payment of such claims ex-gratia.

Sometimes, a court ruling may be required to determine if a payment is a settlement, an ex-gratia settlement or an ex-gratia payment. This is evident in the court cases discussed by Robert M. Hall. Moreover, Hall claims, a reinsurer, or company that obtains an insurance policy from an insurer looking to diversify its risk may not always be liable for insurance claims. Consequently, the inspection of legal contracts to avoid unintended ex-gratia payment may be justified in some instances.

In summary, ex-gratia payments constitute liability free compensation or imbursement for reasons of bypassing higher settlement expenses, legal costs or future liability for which non-ex gratia payment would create precedent or argument for. Employers or contractors may be able to avoid higher expenses by providing timely ex-gratia payment for reasons such as waiver of liability, undue hardship, or for contract mismanagement. The need for ex-gratia payment may be established internally within a corporation, or retro-actively as determined by a legal authority.