Risk Management Articles

Indemnity and Insurance Clauses: an Introduction

Indemnity and insurance clauses are a common feature in construction contracts, maintenance agreements and other agreements that local governments enter into on a regular basis. These types of clauses are often seen as “boilerplate” and given little attention at the contractual negotiation stage. The wording of these provisions can, however, have a significant impact on the rights and responsibilities of the parties in the event a claim arises.

Indemnity Clauses

By definition, an indemnity clause is one in which a party commits to reimburse the other for claims arising out of the occurrence of certain loss or harm. It will typically be incorporated into a more general agreement dealing with the rights and responsibilities of the parties. Local governments often include indemnity clauses in their agreements with their contractors or consultants in order to avoid potential liability for damages arising from the specific activity or project the other party is engaged in. This type of clause is a basic form of risk management and a common feature in most contractual agreements.

Since these clauses purport to shift liability from one party to another, the courts will read them carefully and construe them against the party seeking to rely on them. Even a very broadly worded indemnity will be interpreted restrictively by the courts. This is particularly so in circumstances where a party is seeking to rely on an indemnity provision to avoid the consequences of their own negligence. The law is clear that effect will only be given to such a clause if it is clear on its face that it was meant to apply to negligence.

Covenants to Insure

A covenant to insure typically requires a party to obtain insurance for the specific project or activity contemplated in the agreement and to ensure the local government is named as an additional named insured on the applicable policy.

Covenants to insure often accompany indemnity clauses and for good reason: even if a party agrees to indemnify the other for certain loss or harm, that agreement will be meaningless if the contractor lacks the means or assets to actually provide the indemnification. Insurance clauses are a practical way of ensuring contractors can actually meet their obligations.

It is not unusual, however, for a contractor or facility user group to fail to comply with their duties under an insurance covenant. They may fail to have the local government added as a named insured, or fail to obtain the appropriate coverage. In some cases, they fail to obtain insurance at all.

It is therefore a recommended practice to ensure contractors and user groups comply with their obligations under insurance clauses by insisting they provide a copy of the certificate of insurance naming the local government as an additional named insured. It is also advisable to obtain copies of the underlying policy documents in order to ensure the necessary coverage is in place. If the contract continues longer than the policy period, the local government should follow up to ensure coverage is renewed. 

Go back to previous page.