Every business reaches this moment eventually. A customer, landlord or supplier sends over a contract that runs to thirty pages, and somewhere in the middle sit two clauses that decide who pays if something goes wrong. The first is the indemnity clause, a promise to cover the other party's losses. The second is the insurance clause, which sets out what cover you must hold and prove.
Together they allocate risk between the parties. The indemnity decides who pays, and the insurance clause decides where the money comes from. Neither is a substitute for the other, and both sit alongside the ordinary rules of contract law rather than replacing them. This guide walks through the clauses you will see, the drafting choices behind them, and the traps that commonly catch small and medium businesses.
The indemnity clause: what you are actually promising
What the indemnity promises
An indemnity is a contractual promise by one party to pay the other party's losses arising from specified events. It is not insurance. Insurance is a contract with an insurer, paid for by a premium, and it is regulated: contracts of insurance carry an implied duty of utmost good faith on both parties under s 13 of the Insurance Contracts Act 1984 (Cth), and a party cannot rely on a provision of the contract in a way that breaches that duty (s 14). An indemnity between two commercial parties is a private promise enforced through ordinary contract law.
The practical difference matters. Your insurer's promise is subject to the duty of utmost good faith, but your customer's indemnity is not, so its wording matters far more. And an indemnity you give does not mean your insurance will respond. You can sign a broad indemnity and later discover the loss it covers is excluded from your policy wording.
The variant the other side usually pushes for:
- "In connection with" wording: "you will indemnify us against all losses arising out of or in connection with the services" is far broader than "arising out of your breach of this contract". The phrase "in connection with" can sweep in losses that have little to do with your fault.
- One-way drafting: the indemnity runs only from you to them, even where both parties are capable of causing the loss.
What losses the indemnity covers
Most indemnities hang on the definition of "loss". Check whether it includes:
- Legal costs: sometimes on a full indemnity basis, including costs the other party incurs even where its claim fails.
- Third-party claims: amounts the other party pays to settle or satisfy claims made against it.
- Loss of profits and business interruption: often large and hard to predict.
- Fines and penalties: commonly not insurable, and sometimes excluded by statute.
If "loss" is defined too widely, the indemnity can operate like a blank cheque. The law gives some protection: where an indemnity is ambiguous, it is construed against the party relying on it. The High Court reaffirmed that principle in Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28, where the indemnity clause in a towage contract was interpreted in favour of the party giving the indemnity. But courts only resolve genuine ambiguity. A clearly drafted broad indemnity will be enforced as written, so the definition of "loss" is where the real negotiation happens.
What triggers the indemnity
Indemnities are usually triggered by a defined set of events. Common triggers include:
- Breach of contract: a missed deadline, a failed specification, or non-delivery.
- Negligence: careless conduct that causes loss.
- IP infringement: important for SaaS, marketing, design and product businesses.
- Privacy and cyber incidents: especially where you process customer data.
- Statutory or regulatory breaches: sometimes required by law, sometimes drafted in by the other side.
Negotiation usually focuses on limiting the triggers to matters within your control: your negligence or wilful misconduct, rather than "anything connected to the services".
Who the indemnity protects
Indemnities often protect not just the other contracting party but its directors, officers, employees, agents and related bodies corporate. Each additional class widens the pool of potential claimants and makes disputes harder to manage, because more people can demand indemnification and each may have a different view of how the claim should be run. Check the list of protected persons and ask whether each class is justified in the circumstances.
The cap and the carve-out
Most contracts contain a liability cap, often the fees paid in the last 12 months. But caps routinely come with a carve-out list, and indemnities are frequently carved out of the cap. That means the contract can look capped while the indemnity is effectively uncapped.
When reviewing, look at the carve-out list as carefully as the cap itself. Ask which carve-outs are justified, whether the indemnity has its own sub-cap (for example, a multiple of fees), and whether the cap applies to the indemnity at all. If the other side resists a cap on the indemnity, a sub-cap or a defined list of excepted losses can still contain the exposure.
Control of third-party claims
If the indemnity covers third-party claims, the contract should say who controls the defence:
- who chooses, or approves, the lawyers
- who can settle or compromise a claim, and whether the other side can veto an unreasonable settlement
- whether the indemnifier must be kept informed and given the chance to mitigate the loss
Without these protections you can end up funding a legal strategy you did not choose and could not stop.
When an indemnity becomes an unfair contract term
An indemnity can be void even if it is clearly drafted. Under s 23 of the Australian Consumer Law (the ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth), a term of a standard form consumer contract or small business contract is void if it is unfair: it causes a significant imbalance in the parties' rights and obligations, is not reasonably necessary to protect the legitimate interests of the party relying on it, and would cause detriment to the other party.
The Federal Court applied this to a broad indemnity in Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224. A waste company's standard form contracts required customers to indemnify it against all losses arising "out of or otherwise in connection with" the agreement, even where the loss was not the customer's fault and could have been avoided or mitigated by the company. The Court found the clause unfair because it created a significant imbalance in the parties' rights with no corresponding benefit for the customer.
Since the reforms that commenced on 9 November 2023, proposing or relying on an unfair term in a standard form contract is itself a contravention attracting penalties, rather than merely a void term. For financial products and services, including insurance contracts, the equivalent protection sits in s 12BF of the Australian Securities and Investments Commission Act 2001 (Cth). ASIC's guidance (information sheet 211) explains that a small business is one with fewer than 100 employees or a turnover under $10 million, and that insurance contracts have been covered since 5 April 2021.
This matters in both directions. If your business signs standard form contracts from suppliers, an unfair indemnity can be challenged. If your own standard terms contain one, you face regulatory risk as well as contractual risk.
The insurance clause: what you must hold and prove
Insurance clauses look administrative, but they create ongoing obligations. The indemnity says who pays; the insurance clause says where the money comes from.
The types of cover you may be asked to hold
Common requirements include:
- Public liability: usually relevant where you have premises, run events, or have physical operations.
- Professional indemnity: commonly required for service providers where advice or errors could cause financial loss.
- Product liability: typically relevant where you sell or manufacture goods that could cause harm or property damage.
- Cyber insurance: increasingly requested where you process personal information or provide technology services.
- Workers compensation: required if you employ staff. Schemes are run by each state and territory, and employers must hold the required cover under the scheme that applies to them (see the Fair Work Ombudsman's guidance on workers compensation).
What you actually need depends on your business, your contracts and your risk appetite. The trap is agreeing to hold cover that is not available in your industry, or not affordable at the contract's value.
Minimum amounts and certificates of currency
Contracts commonly set a minimum level of cover, for example $10 million public liability, and require a certificate of currency before the contract starts, on each renewal, and on request. That makes insurance an ongoing compliance obligation. Miss a renewal or fail to provide evidence and the other party may have the right to suspend services, terminate the contract, or treat the failure as a breach.
Before agreeing to a minimum amount, check whether the level of cover is available in your industry, whether it is affordable relative to the contract value, and whether the insurance you already hold meets the requirement. If the requirement is disproportionate to the deal, reducing it or linking it to your revenue or fees is a reasonable negotiation point.
Noting the other party on your policy
You may be asked to note a customer, landlord or partner on your policy as an "interested party". That is common, but it does not usually make them an insured or guarantee that they can claim under your policy. The effect depends on the insurer's wording and on what is actually recorded on the policy. Confirm with your broker or insurer what the notation means in practice, and whether it affects your premium or your cover.
Optional clauses worth asking for
Depending on the deal, these clauses are worth raising in negotiation:
- Mutual indemnities: if both parties supply goods or services, each should stand behind its own conduct rather than only the smaller party.
- Consequential loss exclusion: if you cannot predict or insure business interruption claims, exclude or clearly define indirect and consequential loss.
- Fraud and wilful misconduct carve-out: most counterparties accept that a cap should not protect deliberate wrongdoing.
- Subcontractor flow-down: if you deliver through contractors, your subcontractor agreements should carry matching indemnity and insurance obligations.
- Survival clause: indemnities should survive termination, so claims arising after the contract ends are still covered.
How an Artificer Legal lawyer would review these clauses
When we review a contract for a client, we work through the risk allocation in a set order. First we map the worst case: what could actually happen under this contract, and what the indemnity would require if it did. Then we check the cap and the carve-out list, because that is where uncapped exposure usually hides. Then we look at the scope of "loss", the triggers and the protected persons. Finally we test the insurance requirements against the client's actual policies, because agreeing to cover you do not hold creates a breach from the moment the contract is signed.
The clauses we push back on are the ones that shift risk without regard to control or insurability: indemnities for any loss "in connection with" the services, indemnities that protect the other party's own conduct, indemnities carved out of the cap, and insurance requirements that are not commercially available. The variants we insist on are mutuality where both parties supply, a fraud and wilful misconduct carve-out, sensible caps linked to fees, and control of any third-party defence. For businesses that use standard form terms of their own, we also review those terms for unfair contract term risk, because the penalties regime makes a poorly drafted indemnity clause an enforcement risk, not just a drafting flaw.
A review is usually worthwhile where the deal is high value, the indemnity is uncapped, the other party's requirements are unusual, or the contract involves personal data, intellectual property or regulated activity. If you would like our help reviewing a contract before you sign, contact Artificer Legal for a consultation.
The carve-out that quietly defeats the cap
The drafting choice that most often decides who carries the risk is not the indemnity itself, or the cap, but the carve-out list that sits between them. A contract with a sensible-looking cap and an indemnity carved out of it has, in practice, no cap at all for the losses that matter most. That is why the first question to ask about any indemnity is not how broad it is, but whether it sits inside the cap.
The clauses work as a pair. The indemnity allocates who pays, and the insurance clause funds it. When you review, check the definition of "loss", the triggers, the protected persons, the cap and its carve-outs, and who controls third-party claims. Watch for indemnities so broad they become unfair contract terms, and for insurance requirements you cannot practically meet. If the deal is high value or the risk is hard to quantify, have the clauses reviewed before you sign.