Signing a new contract? Watch out for these clauses

By Chris Dougherty, General Manager, Westlawn Insurance
30 November 2017

There’s a great deal of construction activity happening in the Clarence Valley and across the region at the moment and well into the next few years. There’s the new correctional centre and bridge in Grafton, the new bridge at Harwood and the Woolgoolga to Ballina Pacific Highway upgrade, to name a few.

All this construction activity is great news for the region’s economy. And there are plenty of opportunities for local businesses and individual contractors to participate in this construction boom too. As new contracts are signed by a wide variety of suppliers to these projects, this serves as a timely reminder of the importance of understanding the contracts you’re signing, and importantly, how these contracts may impact your insurance. 

Indemnity clauses in commercial contracts

Indemnity and ‘hold harmless’ clauses are commonly contained in many construction contracts, professional services contracts and supply agreements. These clauses typically shift contractual and legal responsibility from one party to another in a different way to the liability each party would otherwise have under Common Law.

Where a supplier provides an indemnity, they agree to indemnify (or exempt) the recipient from the recipient’s Common Law liability in a written contract.

As an example, a contractor may indemnify the recipient against all loss, damages, claims, liability, expenses, payments or outgoings incurred by or awarded against the recipient arising directly or indirectly from:

  • Any breach by the contractor of the agreement
  • Any act or omission of the contractor (including any negligence, unlawful conduct or wilful conduct) by the contractor relating to the agreement or arising as a consequence of the performance or non-performance of services.

In most cases, the indemnity is designed to help the recipient cover any costs or payments that they incur due to the supplier not performing the service properly (usually due to a supplier’s errors or mistakes).

Often indemnities in construction contracts will seek to pass 100% of responsibility from the recipient to the supplier as a form of ‘risk transfer’ between the contracting parties.

For example, a developer may try to transfer 100% of the project’s construction risk to the building contractor, regardless of who causes any loss or damage, or who would be responsible at law.

If signing any contracts with these types of indemnity clauses, you may invalidate your liability insurance as most liability insurance policies have a contractual liability exclusion.

You should seek legal advice prior to signing any contract and also consult your Westlawn Insurance Broker to determine how your insurance may be impacted by any such indemnity clauses.

Common examples of indemnities

Indemnities may be sought from the supplier for:

  • Claims for loss, compensation or damages due to personal injury or property damage
  • Liability for negligence or for breach of contract
  • Other legal actions and proceedings (e.g. intellectual property infringement, breach of confidentiality, misleading and deceptive conduct or other legal liability)
  • Costs, charges, outgoings, expenses and other payments (e.g. legal costs)
  • Reductions in the value of something, loss of profit and other consequential economic loss, and
  • Taxes and interest payable by one of the parties as a consequence of the default.

What is a ‘hold harmless’ clause?

As mentioned above, along with indemnity clauses, ‘hold harmless’ clauses are also common in many commercial contracts.

A ‘hold harmless’ clause prevents the supplier from holding the recipient responsible for any loss or damage suffered by the supplier. This deprives the supplier of any legal rights to recover damages or a contribution towards damages from the recipient.

Here’s an example: The Contractor holds the Principal harmless from any actions, claims, liability or loss in respect of the performance of the services.

Depending on the way the clause is written, it can provide one party (the recipient) with extensive protection from a legal claim.

How do these clauses impact your insurance?

Your insurance coverage could be adversely impacted by agreeing to carry 100% of another party’s liability, regardless of the extent to which the other party was negligent or at fault.

This could trigger certain policy exclusions in your liability insurance policy such as:

  • Contractual liability exclusions
  • Compromise and settlement exclusions, and
  • Subrogation clauses.

An insurer’s rights of subrogation are the rights the insurer has to ‘step into the insured’s shoes’ and sue or claim against others who have some responsibility for the loss or damage.

This is a key component of insurance because it allows the insurer to recover some of what they’ve paid to you in an insurance claim. Therefore, if you agree to indemnify or hold harmless another party who is responsible, this could trigger exclusions and breach the conditions of your insurance policy. It could also result in the insurer reducing the amount of any claim or denying a claim altogether.

What to do before signing a contract

Before signing any new contract as a supplier of goods or services, you should seek professional legal advice. Your Westlawn Insurance Broker can also assist by reviewing any indemnity and hold harmless clauses in the contract to determine whether they may trigger insurance policy exclusions or breach any conditions of your insurance policy.

Your Westlawn Insurance Broker can also review the insurance clauses in the contract to determine whether your current insurance meets the requirements of the contract.

Contact Westlawn Insurance Brokers on 1300 WESTLAWN (1300 937 852) or email us at insurance@westlawn.com.au

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