Example: The supplier has agreed to indemnify the recipient against claims, loss, liability, expenses and costs arising from the supplier.s supply of a particular product. A third party sues the recipient because that party sustains an injury using the product designed by the supplier. The injury was caused partly by faulty design of the product and partly due to the recipient failing to use the product according to the supplier.s specifications.

The indemnity results in the supplier indemnifying the recipient for 100% of the compensation paid to the third party even though faulty design contributed to 70% to the injury suffered by the third party.

This means that one party is assuming more than their share of actual legal responsibility.

How does this impact the insurance?

When an insured agrees to pick up 100% of liability without any adjustment to take account of the extent to which the other party was to blame, this can trigger certain policyexclusions in liability policies.

In particular:

• Contractual liability exclusions;
• Compromise and settlement exclusions; and
• 'Subrogation' clauses.

The 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. The right of subrogation is a key component of insurance because it allows the insurer to recover some of what they have paid to the insured by way of the insurance claim. If an insured agrees to indemnify or hold harmless another person who is responsible, this can trigger exclusions and breach policy conditions. It can also result in the insurer reducing the amount of the claim.

What to do about this?

It is important for the insured to:

• Have indemnity clauses and "Hold Harmless" clauses reviewed to make sure they do not trigger insurance policy exclusions or breach policy conditions.
• Negotiate changes to the clauses to ensure that the relevant proportionate liability legislation in that State or Territory applies.

Proportionate liability legislation allows a court to 'apportion' certain legal claims between two or more wrongdoers taking into account the extent to which each party contributed to the loss or damage.

Insurance policies are more likely to respond to claims for indemnity where the clause is drafted so that this legislation will apply or contributory negligence can be raised to reduce the amount of the insured's liability under the contract.

Example Indemnity Clause with 'Contributory Negligence' Adjustment:

"The Consultant indemnifies the Principal against all loss, damages, claims, liability, expenses, payments or outgoings incurred by or awarded against the Principal arising directly or indirectly from:

• Any breach by the Consultant of this agreement;
• Act or omission of the Consultant (including any negligence, unlawful conduct or wilful conduct) by the Consultant relating to this Agreement or arising as a consequence of the performance or non-performance of the Services, but such liability shall be limited to the extent that the acts, errors or omissions of the Consultant were to blame for the loss, damages, claims, liability, expenses, payments or outgoings incurred by or awarded against the Principal."

Disclaimer:
This Tip Sheet has been prepared for Steadfast Group Limited and its Shareholders. It contains general information about contractual liability issues. It is not tailored to the individual circumstances of any recipient and is not a substitute for obtaining specific advice about the contractual liability issues that arise in your business.