Contractual Liabilities (indemnities) and Commercial Risks are excluded under insurance, unless such liability would have existed in absence of the contract being in place. In some cases contracts may impose unreasonable conditions and/or liability that would not exist in absence of the contract being in place.
We outline as follows Indemnity and Hold Harmless Clauses that may apply to some contracts:
What is an Indemnity Clause?
An indemnity clause is about risk allocation. Parties to commercial contracts allocate their respective legal risk exposures – whether their exposure is in breach of contract, negligence or other unlawful conduct – in accordance with the provisions set out in the contract. The precise wording of the indemnity clause determines the extent of the indemnity and the risks allocated between the parties to the contract.
At law, an indemnity is a legally binding promise whereby one party (“the indemnitor”) undertakes to accept the risks of loss that another party (often including loss incurred by third parties) may suffer. An indemnity is therefore an obligation to reimburse or make good the recipient of the indemnity (“the indemnitee”) for the loss or liability it may suffer, to the extent provided in the contract.
What is a Hold Harmless Clause?
A “hold harmless” clause gives the recipient of that clause (“the recipient”) the benefit of being “held harmless” – or “not be legally bothered” – by the other contracting party or any other party claiming against the recipient. Like an indemnity clause, a hold harmless clause is a risk transfer mechanism.
An example of a hold harmless clause is when the contractor holds the principal harmless from any action, claims, liability or loss in respect of the performance of the services. Under this hold harmless clause, the contractor is not only prevented from bringing any claim against the principal (even if the principal has contributed to the loss or liability in the first place), the contractor may be required to “hold the principal harmless” by ensuring that the principal does not suffer any loss or liability as a result of the performance of the services which may include claims by a third party.
Careful drafting of the clauses determines the extent of the protection that is given to the recipient of the hold harmless obligation.
Insurance Implications – Waiver of Subrogation Rights
If a company agrees in a contract to “hold harmless” another party without any right to adjust their respective liabilities according to each party’s contribution to the loss or liability, this may jeopardise a company’s insurance for financial liability risks (i.e. potentially no cover in place)
Outlined below is the extent of cover provided by liability and indemnity insurance in relation to contractual liability:
The insurer will not be held liable for any assumptions made by the insured, under any express warranty, guarantee, hold-harmless agreement or indemnity clause. That is, unless such liability would have been in place in the absence of such an agreement.
Where a claim is an alleged breach of contract, the insurer will not reduce their liability. Contributory negligence is not available as a defence.
Cover is provided where, in absence of the agreement, the liability would still be owed. It is not going to extend to cover any breach of contract where additional liability is assumed or as an agent.
It is always recommended that when entering into a new agreement, you seek legal advice as to the nature of the agreement.
Disclaimer – “This material contains general information only and may not suit your particular circumstances. To decide if a policy is right for you please carefully read the relevant Product Disclosure Statement (PDS) and/or Policy wording. While we have exercised due care and skill in preparing this information, Optimum Insurance Services (Optimum) does not accept any legal responsibility or liability for negligence or otherwise to you or anyone else who seeks to rely on this information. This includes, without limitation, loss arising from a possible failure of the information to comply with statutory or regulatory requirements or the failure of the information to identify other terms and conditions beyond those considered in this document. You should obtain advice to ensure that your policy provides adequate cover for your circumstances.
Optimum Insurance Services Pty Ltd is a Corporate Authorised Representative of Insurance Advisernet Australia Pty Ltd (Car No. 291220), Australian Financial Services Licence No 240549, ABN 15 003 886 687.”