Claim Failures, Disputes and Official Sources
Indemnity and hold harmless clauses: when contractual liability is not insured
Why Australian liability policies exclude liability assumed under contract, how to read indemnity clauses in leases and subcontracts, proportionate liability and safer wording.
Business liability policies in Australia generally cover the liability the law would impose on you, such as negligence, but exclude liability you agree to take on by contract beyond that. So if you sign a lease, subcontract or supply agreement promising to indemnify the other party for all losses "however caused", including losses caused by their own negligence, your insurer may not pay the part of a claim that exists only because of that promise. Before you sign, read the indemnity, insurance and limitation clauses, ask your broker or insurer whether the clause is within your cover, and negotiate a clause limited to losses caused by your own negligence or breach.
This guide is part of the liability claim mistakes overview. Examples are illustrative and not legal advice.
How the contractual liability exclusion works
A typical exclusion removes cover for liability assumed under any contract or agreement, unless the liability would have attached to you even without the contract. Many policies then write some contractual liability back in, for example:
- liability assumed under a lease of premises, subject to conditions;
- liability under a principal's indemnity extension for work you perform for a principal;
- warranties of fitness and quality implied by law.
The details differ widely. Read the exclusion and any write-back together.
Three types of indemnity clause
| Clause type | What you promise | Likely insurance position |
|---|---|---|
| Limited to your negligence | To indemnify the other party for loss to the extent caused by your negligence or breach | Usually aligned with liability at law and more likely to be covered |
| Broad "arising from" | To indemnify for any loss "arising out of or in connection with" your work, regardless of fault | Likely partly uninsured: covered only to the extent you would have been liable anyway |
| Indemnity for the other party's own negligence | To indemnify them even where they caused the loss | Often uninsured for the other party's share |
Worked example: a broad indemnity in a lease
An illustrative retail lease requires the tenant to "indemnify the landlord against all claims arising from the use of the premises". A customer trips on a broken stair nosing in a common area that the landlord was responsible for maintaining. The customer recovers $90,000 from the landlord, which then demands payment from the tenant under the indemnity.
- At law, a court might find the tenant 20% responsible (it knew of the defect and did not warn customers) and the landlord 80%.
- The tenant's policy may cover the tenant's own legal liability: 20% of $90,000 = $18,000.
- The remaining $72,000 exists only because of the indemnity clause. If the policy excludes contractual liability and has no lease write-back, the tenant may have to pay it from its own funds.
A clause limiting the indemnity to loss caused by the tenant's negligence would have reduced the tenant's exposure to the insured $18,000.
Proportionate liability
For many claims for property damage or pure economic loss (but not personal injury), state and territory civil liability laws apply proportionate liability: each wrongdoer is liable only for its share. Contracts can alter this in some states: the NSW, Western Australian and Tasmanian legislation allow the parties to contract out of proportionate liability, while other states restrict it. A clause that makes you liable for the whole loss may therefore expose you to more than your share, and that extra exposure may be uninsured. Get legal advice on contracts that address proportionate liability.
Clauses to watch for
- "Indemnify, defend and hold harmless ... however caused"
- "Arising out of or in connection with"
- Release clauses where you give up rights against the other party
- Requirements to name the other party as an "insured" rather than an "interested party"
- Waivers of subrogation, which stop your insurer recovering from the other party
- Requirements for unlimited liability or liability above your policy limit
- Liquidated damages for delay, which are generally not covered by liability policies
Before you sign: a checklist
- Send the indemnity and insurance clauses to your broker or insurer and ask in writing whether they are covered.
- Ask for the indemnity to be limited to loss to the extent caused by your negligence, breach or wrongful act.
- Ask for a mutual indemnity where appropriate, so each party carries its own risks.
- Cap your liability, ideally at or below your policy limit, and exclude consequential loss.
- Check whether the contract asks for a principal's indemnity extension or for the other party to be noted on your policy.
- Record every significant contract on your proposal; see the quote preparation checklist.
Unfair contract terms
For standard form contracts with small businesses (fewer than 100 employees or turnover under $10 million), the unfair contract terms provisions of the Australian Consumer Law and ASIC Act can make unfair terms void, and since 9 November 2023 businesses that propose or rely on them can face penalties. A very one-sided indemnity in a non-negotiated contract may be open to challenge. The ACCC publishes guidance. This does not help if you negotiated and accepted the term.
Links to subcontractor and claim issues
If you engage subcontractors, flow the same discipline down: require them to indemnify you only for their negligence and to hold cover. See subcontractors and certificates of currency. For other common reasons claims are refused, see common liability exclusions and non-disclosure.
Frequently asked questions
Is a principal's indemnity extension the same as covering my contractual indemnity?
Not exactly. A principal's indemnity extension covers the principal for its liability arising from your work, usually subject to conditions. It may not cover every promise in your contract.
My client insists on its standard terms. What can I do?
Ask your broker whether the insurer can endorse the policy to cover the clause, at a price. If not, weigh the uninsured exposure against the value of the contract.
Does the exclusion apply to verbal agreements?
Most exclusions refer to any contract or agreement, which can include oral agreements.
Are lease indemnities common?
Very. Most commercial leases contain tenant indemnities and insurance requirements. Have the lease reviewed before signing.
Sources
- ACCC — unfair contract terms in small business contracts
- Australian Small Business and Family Enterprise Ombudsman — help with contract and lease issues
- Federal Register of Legislation — Competition and Consumer Act 2010 and ASIC Act 2001
- NSW Legislation — Civil Liability Act 2002 (NSW), Part 4 on proportionate liability
