Australia: What do you mean Im not covered? I have insurance!

Making sure your business is covered for all losses

An all too common situation that we see in the legal industry occurs when a claim arises and a business is left without insurance cover because the liability may fall under an indemnity.

We have all heard about indemnity clauses but what exactly are they and why do they matter? Often featured in manufacturing agreements, building and construction agreements, and even labour supply arrangements, an indemnity clause can have two purposes - it can either share liability between two parties or it can completely shift liability from one party to another.

Liability shifting clauses are more common and the below excerpt is an example taken from a Manufacturing agreement in which the Supplier shifts liability to the Manufacturer:

The Manufacturer will at all times indemnify and hold harmless the Supplier, its servants or agents against all actions, claims, proceedings or demands, expenses, costs, losses and damages arising out of its provision of, or failure to provide the Products in accordance with the terms of this Agreement (including arising out of a breach of any of the warranties).

You might agree to such a provision in order to secure a contract, and in the belief that you hold insurances for any losses. However, it can be disastrous for your business if a claim is made and your insurer rejects it because, under the terms of your policy, you have failed to disclose this indemnity provision. Of course by the time you realise, it's too late, a claim has been made and you're liable for it.

Let's take a look at how this can happen in the following scenario:

  • Thanos Builders is constructing a multistorey residential tower and enters into a contract with Green Fit Outs to undertake the fit out works;
  • As part of the contract, Green Fit Outs agrees to provide indemnities to Thanos Builders. These include indemnifying Thanos Builders in relation to any injury claims that arise out of the fit out works in the tower;
  • Green Fit Outs provides the indemnity in the belief that their Public Liability Insurance will cover them in the event of another injury based claim;
  • Green Fit Outs then subcontracts with George's Tiling to tile the bathrooms and kitchens in the tower; and,
  • John, an employee of George's Tiling, sustains an injury whilst performing some of the tiling works and makes a common law claim.

In the above situation, John would usually make a claim against George's Tiling for his injury. However, John may seek to make a claim against Thanos Builders as they were in charge of the work site, or as so often is the case, George's Tiling is no longer in existence.

Assuming that John makes a claim against Thanos Builders, once the company receives the claim, they will likely rely on the indemnity provided by Green Fit Outs because John's injury arose from the fit out works. At this point, Green Fit Outs would contact its insurer about handling and paying the claim under their Public Liability Insurance. However, once the insurer looks at the terms of the contract, it discovers for the first time the indemnity provided by Green Fit Outs.

The Insurer is likely to advise that the claim is exempted under the terms of the insurance policy because Green Fit Outs has assumed contractual liability, without the insurer's knowledge. Essentially, what this means is that because Green Fit Outs has provided an indemnity, they have taken on "additional liability" and the insurance policy doesn't respond to any claims arising out of this additional liability.

This leaves Green Fit Outs in a tough spot, they may have to pay the value of John's claim out of pocket or seek to recover the value of the claim from George's Tiling (which may be a problem if it no longer exists).

Further, if John commenced Court proceedings, Thanos Builders would likely rely on the indemnity and make a cross-claim against Green Fit Outs, possibly leaving Green Fit Outs involved in an expensive litigation without an insurer to foot the bill – in addition to potentially being responsible for paying John's claim.

Lessons to be learned

If a claim is made, and you find yourself in Court/litigation, Coleman Greig can assist you through the process as well as corresponding with your insurer.

Better still, you would be best to consult with an insurance broker initially to obtain the correct insurance or engage them to negotiate with your insurer, so the contract or an entire project is noted on your insurance policy. This will help ensure that you have the appropriate insurance cover for a claim arising out of a contract.

And it is always important to obtain legal advice before entering into a contract. Coleman Greig can assist you to better understand the liability consequences of the contract and whether your insurance policy will cover claims arising out of the indemnity and provide you with some peace of mind when entering into contracts with indemnity clauses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Mario Rashid-Ring
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