If you buy goods and services from a third party supplier, it’s likely you have a contract for that arrangement, filled with indemnity and insurance clauses specific to that purchase.

We know contracts can be complicated, but it’s important to understand the fine print. Here, we give you some tips for what you need to know about indemnity clauses, to assist you to sign your next contract with confidence.

What are indemnity clauses?

Indemnity clauses are commonly used to define who bears the risk under a contract. While an indemnity is little more than an agreement by one party to meet the costs or liabilities incurred by another party – they’re often the cause for disputes.

This is the last thing we want for our clients, so it’s important to understand what each indemnity means, and that you’re not granting them to third parties without good reason. Otherwise, you can open yourself to liabilities not covered by your insurance.

Before providing an indemnity to a third party, we recommend you undertake a risk assessment to fully understand the risks you would be assuming.

What are Whole-of-Government (WofG) contracts?

These are contracts negotiated between the State of Victoria (State) and suppliers for goods and services.

As WofG contracts are negotiated by the State, they usually require the supplier to provide indemnities to the purchaser.

If your organisation is required to follow Victorian Government Purchasing Board (VGPB) policies, then as a purchaser, your organisation must use the WofG contracts to buy goods and services.

Otherwise, you can find out if your organisation is eligible to use the WofG contracts on the Victorian Government Purchasing Board website.

What if a supplier refuses to provide an indemnity?

Standard contract terms usually require the supplier to indemnify the purchaser. If a supplier refuses to indemnify your organisation as a purchaser, you will need to assess the risk assumed by your organisation to ensure this is consistent with the level of risk your organisation can manage.

If a supplier seeks to amend or reduce the indemnities they provide to your organisation, there is a risk that, if your organisation suffers loss in a situation which is not included in the indemnities, your organisation will have to pay all costs and suffer other losses associated with that event. These costs and other losses may not be recoverable in the absence of the indemnity. We recommend you seek legal advice before amending any indemnities included in your standard templates.

Adding insurance clauses to contracts

We strongly advise that your suppliers hold insurance policies appropriate to the relevant purchasing arrangement. The provision of insurance does not remove the liability of a party for their actions, but provides financial protection for that party, in the event of an insurable loss of liability.

The level of insurance you require a supplier to hold should consider the potential risks associated with the purchase of the goods or services and what is typically accepted in the market for the services. We recommend you undertake a risk assessment to determine appropriate levels of insurance.

Are there any notable exceptions?

There are two, which we’ll go into in more detail below.

1. Dealing with Victorian municipal councils

VMIA and Liability Mutual Insurance (insurer of the municipal councils) both recommend that their clients and councils do not include indemnity and insurance clauses in contracts when dealing with each other.

Specifically, this means both parties assume responsibility for their own risks. At the moment, both groups’ insurance is provided on the assumption that common law will prevail and also that the insurances they each maintain are sufficient to cover any foreseeable losses that come about from their own potential liabilities.

Both parties should confirm that the other is insured by VMIA or Liability Mutual Insurance.

2. Dealing with VMIA clients

When you’re dealing with another one of our clients, we recommend (for exactly the same reasons as above) that you not include indemnity or insurance clauses in your contracts. To find out if another organisation is also a VMIA client, get in touch with your Risk Adviser.

Need more information

The Victorian Government Purchasing Board website is a great resource, with guidance on how to select the right insurance levels.

You can also contact us – we’re always happy to help.

Disclaimer: The information provided in this document is intended for general use only. It is not a definitive guide to the law, does not constitute formal advice, and does not take into consideration the particular circumstances and needs of your organisation. Every effort has been made to ensure the accuracy and completeness of this document at the date of publication. VMIA cannot be held responsible and extends no warranties as to the suitability of the information in this document for any particular purpose and for actions taken by third parties.