The importance of clear contractual risk allocation

The way your organisation structures indemnity and insurance clauses can have far-reaching consequences, determining not only who bears the cost when things go wrong, but also whether your interests are adequately protected.

Ambiguity in these clauses, or gaps between what’s promised and what’s actually insured, can lead to disputes, litigation, and unexpected exposures. Ensuring your contracts are clear, robust, and supported by sound internal processes, is essential for safeguarding your organisation’s interests.

Insights from VMIA webinar

A recent VMIA webinar, “Risky Business: Insurance and Contracts”, tackled the complex interplay between insurance and indemnity clauses in third-party agreements. This is a topic that continues to generate significant interest and queries from our clients.

The session featured guest speaker, Cameron Roberts, Partner at Thomson Geer, who brings over 20 years’ experience expertise in liability and insurance, including public and product liability, professional indemnity, contractors’ all risks, property, industrial special risk, and self-insurance. Cameron was joined by VMIA’s Jonathon Masom, Client Capability Manager, and Tim Kasem, Product Specialist – Casualty and Cyber, who provided additional insights from a risk and insurance perspective.

The webinar explored the essential elements of contracts that impact insurance and risk allocation, including:

• Indemnity clauses: Clarifying who pays when things go wrong
• Insurance requirements: Ensuring third-party coverage aligns with your risk profile
• Waivers of subrogation: Protecting your organisation from unforeseen claims.

Through real-world examples and case law, the presenters demonstrated how ambiguity in contract terms can destabilise risk transfer and lead to disputes, and why clear drafting and robust internal processes are vital for effective contract management.

The session also provided a practical overview of how indemnity and insurance clauses operate; their significance in allocating liability; and the importance of ensuring that the party providing the indemnity has the financial capacity to honour it, which is often achieved through robust insurance arrangements.

^{(note: Some parts of the webinar have been removed to fit the purpose of this video for wider sharing)}

Practical tips and next steps

The session highlighted several important risks, particularly those associated with broad indemnity clauses, where one party indemnifies another for all liabilities, for all except the other party’s negligence, or only for their own negligence. These clauses are often the source of disputes and litigation.

To mitigate these risks, insurance clauses should clearly specify the type and amount of cover, the period of insurance, who’s insured, and whether defence costs and waivers of subrogation are included. Case law discussed during the webinar demonstrated how courts interpret the relationship between indemnity and insurance clauses, reinforcing the importance of precise drafting to prevent ambiguity and unintended gaps in cover.

Key takeaways include:

• Indemnity clauses: Understand the three main types of indemnity clauses mentioned and their implications. Broad or unclear clauses can lead to disputes, so clarity is essential.
• Insurance requirements: Ensure insurance clauses specify the type, amount, period, and parties covered, and that they align with your organisation’s risk profile.
• Waivers of subrogation: Properly drafted waivers protect your interests and prevent circular claims between insured parties.
• Contract management: Always request and verify evidence of insurance. Activate approval mechanisms and maintain robust internal systems to avoid inadvertently waiving important protections.
• Drafting tips: Clearly identify parties, define triggers and scope, and ensure contract terms match insurance policies to minimise ambiguity and future litigation.

For further guidance, clients are invited to view the webinar recording and reach out to VMIA for tailored advice on contract risk and insurance.