The Insurance Clauses in Your Contracts Could Be Creating Risks You Never Intended to Take

When reviewing a business contract, it’s natural to focus on the practical details, such as pricing, payment terms, deadlines and deliverables. However, insurance requirements and liability clauses can be just as important, even if they don’t receive the same level of attention. Depending on how they’re written, these provisions could leave your business responsible for significant financial losses that your existing insurance may not cover.

Insurance requirements, indemnities and liability provisions are common in commercial contracts across Australia. While they are intended to clarify responsibilities and manage risk, poorly negotiated clauses can leave your business responsible for losses that your existing insurance was never designed to cover.

The concern is not simply whether you have enough insurance. It is whether the obligations you have accepted under a contract actually align with the protection your insurer has agreed to provide.

For business owners, directors and financial managers, understanding this distinction could prevent an expensive surprise when a claim arises.

Two people signing printed contract documents at a wooden table

Why Your Contractual Obligations May Not Match Your Insurance Cover

Commercial contracts regularly contain provisions requiring one party to accept responsibility for certain losses, maintain specific insurance policies or compensate another party if something goes wrong.

These requirements are particularly common in construction, professional services, manufacturing, technology, logistics and other industries where several businesses may be involved in delivering a project or service.

However, there is an important distinction between what your contract requires you to do and what your insurance policy covers.

Your contract determines the obligations you have agreed to accept. Your insurance policy determines which losses your insurer may cover, subject to its terms, conditions and exclusions.

Those two documents do not automatically align.

For example, a supplier might agree to indemnify a client against all losses arising from a particular project. The supplier may also have $20 million in Public Liability Insurance.

That does not necessarily mean the insurer will cover every loss the supplier has agreed to indemnify the client against. Certain contractual liabilities may fall outside the policy’s scope, particularly where the supplier has accepted responsibilities beyond those it would ordinarily have under law.

The Australian Government’s (business.gov.au‘s) guidance on preparing contracts specifically advises businesses to check that their insurance covers the liabilities they may assume under a contract.

Unfortunately, this comparison is not always made before an agreement is signed.

6 Contract Clauses That Could Expose Your Business to Uninsured Losses

1. Broad indemnity clauses that make you responsible for someone else’s losses

An indemnity clause is a contractual promise to compensate another party for certain losses, damages or liabilities. These provisions are standard in many commercial agreements, but their wording can significantly affect how much responsibility your business accepts.

Consider the difference between agreeing to compensate a client for losses caused by your company’s negligence and agreeing to compensate them for all losses arising in connection with your services.

The second obligation is potentially much broader. Depending on the wording and applicable law, it could expose your business to losses that were only partly your responsibility, or even losses primarily caused by another party.

This becomes particularly concerning when contracts include:

Indemnities that are not limited to your company’s negligence, breach or misconduct
Obligations covering losses caused by other parties
Indemnities extending to indirect financial losses or business interruption
Requirements to cover legal costs regardless of who is ultimately responsible
Indemnities that continue indefinitely after the contract ends

The problem is that insurance policies may exclude or restrict liabilities assumed solely through contractual agreements.

Queensland Crown Law’s guidance on indemnity clauses specifically identifies the risk of accepting obligations beyond your control and notes that many commercial insurance policies restrict cover for certain assumed contractual liabilities.

What to consider: Before accepting an indemnity, determine whether it is appropriately limited to losses caused or contributed to by your business. Your legal adviser and insurance broker should also assess whether the proposed wording introduces liabilities outside your existing cover.

2. Insurance requirements that your current policies cannot satisfy

Many commercial contracts specify minimum insurance requirements, often including particular policy types, coverage limits and conditions.

A major client might require $20 million in liability cover, while another contract requires a particular extension to your Professional Indemnity Insurance.

Meeting these obligations may sound straightforward, particularly if your business already holds substantial insurance.

However, the amount of insurance you hold is only one part of the equation.

Contracts can impose requirements that standard policies do not automatically provide, such as coverage for particular business activities, overseas operations, subcontractors or additional insured parties.

For example, a technology company might agree to take responsibility for financial losses arising from a software failure. Yet the company’s existing policy may have exclusions, sublimits or conditions that affect whether those particular losses are covered.

Even where additional cover is available, it may require an endorsement, a different policy structure or approval from the insurer.

There is also a commercial consideration. Agreeing to higher insurance limits can increase premiums, making a contract considerably less profitable than originally anticipated.

What to consider: Before committing to a client’s insurance requirements, confirm that the necessary cover is available, affordable and appropriate for the risks involved. Ideally, this should happen before the contract’s commercial terms are finalised.

3. Liability limits that are confused with insurance limits

One of the most misunderstood aspects of commercial contracts is the relationship between insurance limits and contractual liability limits.

They are not the same thing.

Suppose your company signs a contract requiring $20 million in liability insurance. That requirement does not automatically mean your company’s liability under the contract is capped at $20 million.

If the contract contains an unlimited indemnity, or certain liabilities are excluded from its liability cap, your potential financial exposure could exceed your insurance limit.

The reverse can also occur. A contract might cap liability at $2 million, but contain separate provisions that remove certain claims from that cap.

These exceptions are sometimes overlooked because the agreement appears to offer a reasonable limitation of liability.

The Australian Government Solicitor’s guidance on contractual indemnities and liability caps highlights the importance of considering how these provisions interact. It also explains that requiring a contractor to hold a particular level of insurance does not generally limit that contractor’s liability to the insured amount.

For larger Australian businesses managing multiple commercial agreements, these inconsistencies can create significant financial uncertainty.

What to consider: Review contractual liability caps alongside indemnities, exclusions and insurance requirements. A clearly stated liability cap is useful only if you understand what it applies to and which obligations fall outside it.

4. Requirements to name other businesses on your insurance policy

Some contracts require your business to extend insurance protection to another party, such as a landlord, principal contractor or project owner.

This might involve adding them as an insured party or agreeing to particular arrangements concerning how claims are handled.

Such requirements are common in construction, property and infrastructure contracts. However, they should not be treated as automatic administrative changes.

The wording matters because different arrangements can provide very different levels of protection.

For example, a contract might require your insurer to:

Name another organisation as an additional insured
Waive certain rights of recovery against the other party
Extend protection to specified contractors or related entities
Provide particular arrangements for claims involving multiple insured parties

These arrangements may be available under some policies, but not all.

Agreeing to them without checking with your broker and insurer could leave your business in breach of its contractual obligations or create a misunderstanding about the protection available.

It is also worth remembering that a certificate of currency is not a complete explanation of a policy’s terms. As Business Queensland explains, certificates generally confirm information such as the insured entity, type of cover and whether a policy is current on a particular date.

They do not establish that every contractual requirement or potential claim is covered.

What to consider: Have your insurance broker review requests for additional insured parties, waivers of subrogation and other policy amendments before agreeing to them. Where necessary, obtain written confirmation from the insurer.

5. Obligations that continue after your contract ends

Completing a project or ending a commercial relationship does not necessarily end your potential liability.

Certain contractual obligations can continue for years, particularly where professional advice, design services, technology systems or other work could give rise to claims long after delivery.

This creates an important consideration for businesses holding Professional Indemnity cover.

Many professional indemnity policies operate on a claims-made basis, meaning that the timing of a claim, notification requirements and the policy’s retroactive date can affect whether insurance responds.

A consultant might complete a project in 2026, only for a client to identify an alleged error several years later. Whether the consultant has insurance protection at that point depends on the relevant policy arrangements and circumstances.

The contractual obligation may still exist even if the original insurance policy has expired.

This is why some contracts require businesses to maintain appropriate insurance for a specified period after the work is completed.

The Australian Securities and Investments Commission (ASIC) also recognises the importance of ongoing cover and retroactive dates in professional indemnity arrangements, including the possibility of claims emerging after the original services were provided.

What to consider: Check how long your contractual obligations continue and whether your insurance arrangements can accommodate them. Pay particular attention to claims-made provisions, retroactive dates, continuity of cover and any contractual requirements to maintain insurance after completion.

6. Cybersecurity and data protection obligations that exceed your cover

As businesses become increasingly dependent on digital systems and third-party technology providers, cybersecurity obligations are becoming a more important part of commercial agreements.

Close-up of an illuminated teal circuit board representing cybersecurity and data systems

Contracts may require suppliers to meet specific security standards, protect confidential information, notify clients of incidents within strict timeframes or compensate them for certain losses resulting from a data breach.

While these obligations may be commercially reasonable, their financial consequences can be substantial.

For example, a company providing software or data processing services might agree to compensate a client for financial losses associated with a cybersecurity incident.

However, its Cyber Insurance may not cover every contractual obligation, penalty or category of financial loss arising from that incident.

Certain exposures may instead fall under specialist IT Liability Insurance, depending on the nature of the services and policy wording.

The distinction matters because a single incident could generate multiple claims involving data loss, system outages, contractual breaches and third-party financial losses.

What to consider: Businesses that handle client information or provide technology services should assess their contractual cybersecurity obligations alongside their insurance policies. Particular attention should be given to contractual indemnities, notification requirements and the financial consequences of failing to meet agreed service standards.

Could an Unfair Contract Clause Be Challenged?

Not every contractual obligation that appears unreasonable will necessarily be enforceable.

Australia’s unfair contract terms laws provide protections for certain businesses entering standard form contracts. Since 9 November 2023, the protections have applied to qualifying small businesses with fewer than 100 employees or less than $10 million in annual turnover.

Under the legislation, a term may be considered unfair where it creates a significant imbalance between the parties, is not reasonably necessary to protect the legitimate interests of the advantaged party and would cause detriment if applied.

The Australian Competition and Consumer Commission (ACCC) identifies excessively broad indemnities and unreasonable limitations of liability among the contractual provisions that can raise concerns.

However, these protections do not apply to every commercial contract, and whether a particular clause is unfair depends on its wording and the circumstances.

Businesses should therefore avoid assuming that a problematic contractual obligation can simply be challenged after a dispute arises.

Reviewing and negotiating the terms before signing remains the preferable approach.

How to Protect Your Business Before Signing a Contract

For companies regularly entering substantial commercial agreements, contract insurance reviews should form part of normal risk management.

This is particularly important when negotiating with large customers, government agencies, principal contractors or organisations that impose their own standard contractual requirements.

Rather than reviewing legal and insurance obligations separately, businesses should examine how the two interact.

Business professionals reviewing paperwork with a pencil beside a laptop

Five questions worth asking before you sign

1. What additional liabilities are we accepting?

Identify obligations that extend beyond your company’s normal legal responsibilities. Pay particular attention to indemnities covering third-party losses, subcontractor activities or circumstances outside your direct control.

2. Are these liabilities covered by our existing insurance?

Do not rely solely on policy names or insurance limits. Confirm whether the relevant policies respond to the specific exposures created by the contract, including any applicable exclusions, conditions and sublimits.

3. Are we agreeing to liabilities beyond the value of the contract?

A commercially attractive agreement may become considerably less attractive if it exposes your business to potentially unlimited financial claims. Consider the relationship between contractual revenue, potential loss and available insurance.

4. Can we meet every insurance requirement?

Check whether the contract requires additional insured parties, specific endorsements, higher policy limits or cover extending beyond the contract period. Confirm these requirements with your broker rather than assuming they can be accommodated.

5. What happens if the contract changes?

Contract variations, new activities, subcontracting arrangements and expanded project scopes can introduce exposures that were not anticipated when the original agreement was signed.

A contract that aligned with your insurance at commencement may no longer do so after the scope of work changes.

For businesses managing multiple contracts, establishing a consistent review process can help identify these issues before they become claims.

It may also be useful to maintain a register of significant contractual insurance obligations, including policy requirements, liability limits, indemnities and renewal dates.

This gives financial managers and risk teams greater visibility over the commitments the organisation has made.

Why Your Insurance Broker Should Be Involved Before You Sign

Commercial contracts are often negotiated between legal advisers, procurement teams and senior management. Insurance brokers may only become involved after an agreement has been executed, usually when someone requests a certificate of currency or an increase in cover.

By that stage, the business may already have accepted obligations that are difficult or expensive to insure.

A proactive insurance broker can help identify these issues earlier by reviewing the insurance requirements alongside your existing policies.

This may involve determining whether:

Your existing policies satisfy the contract’s requirements
The agreement creates additional or uninsured liabilities
Suitable policy extensions or endorsements are available
Higher limits or specialist insurance arrangements are necessary
Contractual requirements could affect premiums or future renewals
Alternative insurance provisions could be discussed with the other party

Your lawyer remains responsible for advising on the legal meaning and enforceability of contractual provisions. However, an experienced insurance broker can assess their insurance implications and help identify where contractual commitments may exceed available cover.

For medium-to-large Australian businesses, this coordination between legal, financial and insurance advisers can be particularly valuable. Complex commercial arrangements often involve multiple contracts, insurers and stakeholders, making it easier for gaps to develop without a coordinated approach.

Don’t Let a Contract Create an Insurance Problem You Could Have Avoided

Commercial contracts are essential to doing business, but their insurance provisions deserve considerably more attention than they sometimes receive.

A clause that appears to be a standard requirement could expose your company to liabilities beyond its existing insurance protection. Equally, an agreement that initially seems commercially attractive may carry insurance costs or financial obligations that materially change its value.

Understanding these risks before signing gives your business an opportunity to negotiate appropriate terms, review its insurance arrangements and make informed decisions about the responsibilities it accepts.

At Crucial Insurance and Risk Advisors, we work with Australian businesses to assess complex risks, review contractual insurance requirements and identify suitable Business Insurance solutions.

As an award-winning insurance brokerage with experience in complex and hard-to-place risks, we help businesses understand where their existing protection may fall short and explore options to address those exposures.

If you’re entering a significant commercial agreement or are unsure whether your existing insurance meets your contractual obligations, contact Crucial Insurance to discuss your options with an experienced insurance broker.

References

This article was written by Tony Venning,
Managing Director at Crucial Insurance and Risk Advisors.
For further information or comment please email info@crucialinsurance.com.au.

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