- Seek advice when dealing with contractual indemnities, as minor variations in wording can significantly impact their interpretation by the court.
- Inconsistent insuring clauses may lead to the readjustment of contractual indemnities.
- Lack of effectiveness or insurance coverage behind an indemnifier can shift liability back to the indemnified party.
- Whether you are giving or receiving a contractual indemnity, it is crucial to ensure there is adequate insurance coverage.
What is a contractual indemnity?
A contractual indemnity refers to a provision in a contract or agreement where one party transfers their risk to another party. Typically, these indemnities are explicitly stated in writing, although they can also be implied through the course of conduct or to enhance the efficacy of the contract. Courts treat the interpretation of contractual indemnities similarly to other contract clauses.
However, if ambiguity remains after applying the rules of contractual construction, the clause is strictly interpreted against the party seeking to rely on it
Types of Contractual Indemnities:
Several standard contractual indemnities are commonly used, including:
(a) Bare Indemnities: Providing indemnification for all losses incurred by the other party without limitations.
(b) Reverse Indemnities: Indemnifying the other party against losses resulting from the acts or omissions of the indemnified party.
(c) Proportionate Indemnities: Indemnifying against losses, excluding those arising from the indemnified party's own negligence. This type of indemnity maintains the apportionment of liability that would occur in the absence of the contract, based on common law principles.
Application of contractual indemnities:
Even slight differences in wording within contractual indemnities can significantly influence their interpretation by the court. These clauses are subject to the rules of contractual construction and must be read in conjunction with the entire contract. A liability assignment clause is often accompanied by an insurance obligation clause, which may result in the readjustment or narrow interpretation of the indemnity to align with the insuring clause.
For instance, an indemnity that appears all-encompassing may be read down to correspond with the obligation of each party to obtain their own insurance for their individual liabilities.
Contracting Out of Liability in Queensland
In Queensland, it is possible to contract out of liability through a carefully drafted contractual indemnity clause that:
(a) Transfers liability for damages, including one's own negligence, misconduct, or breach of contract, to the contracting party.
(b) Exempts liability for damages to third parties.
(c) Requires the contracting party to insure the indemnifying party against liability for damages resulting from negligence, etc.
However, since the implementation of the proportionate liability scheme in Queensland under the Civil Liability Act 2003, contractual indemnities do not apply to liability for property damage or consequential loss. The proportionate liability regime, which cannot be contracted out of in Queensland, determines liability based on the extent to which a party is found liable for the damage under common law.
Insurance Coverage for Contractual Indemnities:
Standard public liability insurance
policies usually include a "contractual liability exclusion" that limits coverage for liabilities assumed under a contract beyond those arising from common law. When providing a contractual indemnity, it is essential to ensure that your insurance policy does not contain a contractual liability exclusion or any other terms that would exclude coverage for indemnity claims.
Similarly, if you are the recipient of an indemnity, it is prudent to verify that the indemnifier has adequate insurance coverage or sufficient means to fulfill the indemnity. In the absence of insurance or means, joint and several liability principles may shift the liability back to you. Therefore, it is recommended to consult with your insurance broker or legal advisor before signing any contracts.
Seeking professional advice:
Before signing any contract, it is highly recommended that you consult with a broker or legal advisor to make sure you have a comprehensive understanding of contractual indemnities and related insurance considerations.
Seeking professional advice on contractual indemnities and insurance? Contact Insurance HQ
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