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Risks from agreeing to an indemnity

It is critical to understand that although indemnity clauses are commonplace in commercial agreements such as event or hiring agreements, a NFP’s insurance (including any professional indemnity, public liability or products liability) is not likely to cover the liability under the indemnity. The reason being is that most insurance policies specifically exclude cover for any liability assumed by way of an agreement only (which is the case with most indemnities).

Accordingly, if the NFP’s insurance does not cover the indemnity the NFP would be required to pay that liability “from its own pocket”.

As a simplistic example only – if someone were severely injured during an event and the courts determined that the NFP was responsible to the extent of 50% of the injury and the event management organisation (the “Event Manager”) was responsible for the balance:

  • the NFP’s insurance company is expected to cover the 50% for which the NFP was held responsible; however
  • regarding Event Manager’s proportion, the Event Manager (or its insurer if it had claimed the matter on its insurance policy) would then seek to recover that liability from the NFP under its indemnity;
  • the NFP’s’ insurance company would not cover that liability under the indemnity, the NFP would need to cover that liability personally.

If the NFP must pay the liability “from its own pocket” this will directly affect the organisations or persons it was established to assist and, worse case scenario, the NFP may need to be wound up.

So, by agreeing to an indemnity you have significantly increased the risk to your NFP and its stakeholders.

How can you best manage an indemnity to reduce the risk to your NFP?

When negotiating indemnities, you may consider one or more of the following strategies:

  • omit the indemnity clause – eliminate the risk;
  • omit the indemnity clause but offer principal’s liability insurance for the particular event/ agreement –you will need to consider the costs of obtaining principal liability insurance;
  • limit the indemnity:
  • require the indemnity to be subject to a liability cap – as a general guide negotiate up to an overall liability cap of 100% of the contract price plus the proceeds of insurance policies.
  • require the indemnity to only extend to the loss or damage within the control of the NFP, and only apply to loss or damage caused by the NFP
  • ensure the indemnity provides for a proportional reduction in liability
  • place an obligation on the principal to mitigate any loss or damage

Above all, check your NFP’s insurance policy.  You must ensure that any indemnity provisions which are agreed to in contracts are covered by the insurances in place and do not invalidate policies of insurance.  For this reason, it is advisable that any negotiations and agreement of indemnity provisions involve your NFP’s insurance broker and are made subject to acceptable insurance cover being obtained.

If you need assistance in reviewing or negotiating the indemnity provisions under a contract you are considering, NFP Lawyers are happy to assist. Please contact Dr Joanne Redburn on 07 3160 0010

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