Understanding contractual liabilities and the insurance implications of the various indemnity provisions imbedded within a contract, is a crucial element of any risk management program and integral to protecting your business on your next project.
Additionally, being aware of your insurance coverage and any potential gaps in that coverage with respect to your contractual arrangements, can help you make more informed decisions and mitigate potential exposures on your balance sheet, through obtaining the appropriate insurance coverage.
We thought we would start with some of the basics and cover 5 of the frequently asked questions we find our clients proposing when we review their contracts.
- What is an indemnity?
An indemnity is a promise to pay for liabilities. It is a form of risk allocation. Indemnities are commonly found in contracting arrangements when a party seeks to impose a risk and liability for that risk on another party.
- Where do I find an indemnity provision in a contract?
Contracts generally contain headings. Headings are usually for guidance only. It is common to find indemnity provisions under the heading “Indemnity” and/or “Indemnity and Insurance”. Nevertheless, you must be very careful as it is common for indemnity provisions to be found throughout an agreement even where there are headings which purport to identify the indemnity and insurance clauses. It is not uncommon to see more than one clause in a contract that contains an indemnity provision.
- So how do I work out what the indemnity clause means?
An indemnity clause will identify the nature of the promise. However, in many documents there are defined terms. Those defined terms are usually capitalised or in bold. If there is a defined term in an indemnity clause it is important that you check the definition. It is particularly important to check for definitions which relate to the services that are provided under the contract and any definitions of the indemnified party.
The definition of “indemnified party” may specify that the contracting party includes employees, agents, contractors and subcontractors and in those situations the agreement may require you to indemnify the other party for acts and omissions or defaults of someone with whom you have no relationship, you might not even know they were involved or affected by the contract. The person providing the indemnity may have no relationship with the parties they are liable to indemnify and may not initially know of their existence. This is obviously problematic.
- Will my liability insurance cover indemnities?
Generally, liability insurance policies will not cover liability you have assumed under contract.
As most insurance policies have a clause which will exclude any claim for liability assumed under contract. The policy will generally cover you for liability assumed under a contract if that liability would have been imposed notwithstanding the contract, however, where the liability assumed under contract extends beyond what would normally be imposed at law i.e. the above examples, you will not be covered. Once again you must check both the insurance policy and contract in detail, as it is very common that the indemnity provisions of contracts are not adequately met by the coverage of a standard liability insurance policy.
- So, what do I do when I am asked to sign a contract that contains an indemnity provision?
We recommend you seek assistance in your negotiations. If you limit the application of indemnity provisions you reduce your risk and possibly reduce the cost of your insurance. You also increase the chances that you will be able to secure cover for liability assumed under contract. We recommend that you obtain legal advice before you agree to provide any indemnity. We also recommend that your insurance broker reviews all of your contracts to ensure that your program adequately meets the requirements and conditions being imposed on you.
In summary, understanding contractual liabilities and their intertwined indemnity provisions is crucial in order to protect your business from potential risks and losses. By gaining a better understanding of these concepts, you can make more informed decisions when managing contracts and ultimately protect your businesses livelihood.
We hope this has shed some light on the complexities of contract management, but should you wish to explore any of the above points further, or for a complimentary contract review of your next project, please reach out to our team and they would be happy to assist. Furthermore, we will readdress this topic in future blogs, so please stay in touch through subscribing to our newsletter and following our Linked-In page.
