Insurance Law Update - The interplay between indemnity clauses, releases and insurance

Commercial Law
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An indemnity is a provision in a contract which provides that one party is to be maintained harmless for the actions or inactions of another. In simple terms, an indemnity  clause is a provision which has the effect of allocating or transferring risk between the parties to a contract to prevent loss or compensate for loss which may occur as the result of a specified event. 

Thus, when properly understood, an indemnity is a clause in a contract which has the effect of allocating risk, and perhaps altering where risk and liability might otherwise fall at common law, between the parties to the contract.

The use of indemnity clauses can be fraught for contracting parties, and also their legal and other advisors. It is not uncommon for a party with greater commercial influence and bargaining strength to insist on an indemnity from another party, frequently in the broadest possible terms. In such circumstances, the indemnity provision may not be given sufficient consideration when the contract is drafted. Too often, the indemnity is based on a "boiler-plate" clause obtained from the electronic precedent files of the practitioners who have been retained to settle the relevant contractual arrangements. 

Where the indemnity allocates risk between the parties in a way which in not reflective of the inherent or underlying risk of their relationship, and which is otherwise inconsistent with their respective common law rights and obligations, unanticipated results may follow. This can be especially so when the indemnifier is not insured or cannot obtain such insurance for the full extent of the liability imposed by the indemnity. This may occur as the availability and scope of liability insurance in the Australian insurance market does not reflect certain risks undertaken by contracting parties by reason of entering into a broad indemnity.

The indemnity and the common law

The contractual Indemnity can and is frequently used in order to expand the range of losses that can be recovered at common law by the person in whose favour the indemnity is given (principal) against the indemnifier, whether in contract or tort. This is achieved in a variety of ways. 

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Tomaso Di Lallo has an extensive commercial law practice in the Supreme and Federal Courts

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