Indemnity clauses and a carve out for proportionate liability = increased exposure for construction professionals

An issue for construction professionals in Australia which has been commented on for some years is the mismatch between the broad indemnities often contained in consultancy agreements and the cover provided by professional indemnity insurance policies which traditionally exclude contractually assumed liability unless the liability would have existed independently. Usually it is the principal or head contractor which has the bargaining power in the contracting relationship and will insist on a broad indemnity clause in the consultancy agreement.

The market response by some insurers has been to write back the cover by endorsement. This can result in unexpectedly large exposures for insurers in commercial construction projects. An indemnity can be drafted so that it is not necessary for the principal/head contractor to prove the consultant caused the loss and can extend the consultant's liability for loss that would otherwise be too remote and not recoverable. Further, the indemnity can be drafted so that there is no duty of the principal/head contractor to mitigate its loss.

The indemnity clauses that we have seen in consultancy agreements in recent claims have been drafted in the broadest possible terms. While indemnity clauses are construed strictly, if the meaning is plain, the courts in Australia will not rewrite what is, in effect, a bad bargain for the consultant and ultimately its insurer.

The effect of contracting out of the proportionate liability regime

Each jurisdiction implemented a proportionate liability regime with various differences between the jurisdictions. In a claim that attracts the operation of the proportionate liability regime, a party's liability is limited to the extent to which they were responsible for the loss incurred by the plaintiff.

Under the proportionate liability regime, for relevant claims the burden sits with the plaintiff to sue all wrongdoers in order to recover all of the loss.

If parties contract out of the proportionate liability regime, their ability to claim against each other will be according to the previous rules relating to joint and/or several liability. A plaintiff can select the defendant with the deepest pockets from which to recover all of its loss and it would be up to the defendant to pursue the other wrongdoers for a contribution.

Findings of a liability for misleading and deceptive conduct by two or more alleged wrongdoers can complicate the proportionate liability considerations in the event that there are also liabilities in tort and in contract.

Where parties contract out of the proportionate liability regime, it may also affect their entitlement to indemnity under general liability and professional indemnity insurance policies, which often exclude liability assumed under contract which would not otherwise arise at law. Construction professionals often seek to deal with this issue by negotiating a limit on the operation of such exclusions in project specific insurance policies.

Effect of re-allocation through contractual indemnities

Where re-allocation of liability as between defendants is permitted, it allows parties to agree on risk allocation in their contractual arrangements. This provides certainty as to the extent to which a party will liable for an apportionable claim.

However, the onus is on the party to seek that contribution or indemnity from the other defendants or third parties, as opposed to in the proportionate liability regime where the onus is on the plaintiff to sue all relevant parties to recover all of its loss.