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Draft – Indemnity session

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Draft – Indemnity session Powered By Docstoc
					    Comcover Information Session – 30 November 2004
          Coverage of Contract Indemnities
                     Mark Adams
             Comcover Insurance Services

Introduction

Today I will be providing information on the following -

     The Comcover policy clauses that impact on the issuing of the
indemnity
   Agency obligations
   Comcover considerations
   Supporting materials

Wording – the impact of issuing an indemnity

As from 1 July 2004, Comcover’s standard terms of cover altered. The policy
no longer allows for the automatic coverage of indemnities that are included in
a contract. It is important that agencies take note of the following clauses and
how they will impact on managing indemnity exposure:

   General Exclusion 2.9.12

“2.9.12. liability arising out of any indemnity unless the liability would have
                   arisen in the absence of such indemnity

                                     This exclusion does not apply to
                                     indemnities contained in a contract where
                                     the contract was entered into prior to 1 July
                                     2004.
                                     Commonwealth policy on the issuing and
                                     managing of indemnities is detailed in
                                     Financial Management Guidance No. 6 –
                                     Guidelines for Issuing and Managing
                                     Indemnities, Guarantees, Warranties and
                                     Letters of Comfort, September 2003.
                                         See also Part 3. General Information –
                                          section 3.6 Contracts with Outside
                                          Organisations



     This exclusion excludes liability arising from an indemnity unless the
liability also arises at common law. Therefore, if an agency agrees to the


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issuing of an indemnity (that is, extends the agency’s liability beyond common
law) and does not obtain Comcover’s agreement to cover the indemnity
under the policy, there is no cover in the event of a claim.
   There is no need to refer indemnities to Comcover for consideration if
the indemnity does not extend the agency’s liability beyond common law, as
the policy will automatically provide cover (subject to the standard terms and
conditions of the policy).

   Condition 2.10.9

          “Subrogation
2.10.9. When a claim payment is made, Comcover will have your rights of
            recovery to the extent of the claim payment. You must allow
            Comcover to claim indemnity or contribution in your name from
            any party against whom you may have such rights.”

   This condition requires you as the insured to allow Comcover to recover
claim payments on your behalf from responsible third parties. If you are
negotiating a provision that extends your liability beyond common law, and
your legal advice indicates this will impact on this clause, you will need to
refer the indemnity to Comcover for consideration.
   An example would be a liability cap that limits the liability of a contractor
to an agreed amount. If a claim occurs that exceeds the capped amount,
Comcover may limit its claim payout, as they would be unable to recover any
amount in excess of the capped amount from the contractor. This may leave
your agency exposed in relation to the difference.

   General information part 3 3.6

“3.6 CONTRACTS WITH OUTSIDE ORGANISATIONS
         Contracts entered into by members should, wherever possible,
         provide for insurance and indemnity from vendors, contractors and
         sub-contractors indemnifying the Commonwealth or member. The
         Commonwealth’s policy on issuing indemnities to other parties is to
         accept such risks only when the expected benefits outweigh the
         potential losses. Before issuing an indemnity, potential losses
         should be rigorously investigated and identified. Indemnities can
         only be issued by a duly authorised person.
                                   Commonwealth policy on this is contained
                                   in Financial Management Guidance No. 6 -
                                   Guidelines for Issuing and Managing
                                   Indemnities, Guarantees, Warranties and
                                   Letters of Comfort, September 2003. “

This clause reinforces the requirements under the Financial Management
Guidelines.




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Agency obligations

Agencies will be guided by Financial Management Guidance No. 6 on
negotiation of contracts containing indemnities. The contract approval process
will generate documentation that will identify indemnities, assess their effect
and the potential for crystallisation of liability, and estimate the potential
financial exposure. It is the agency’s responsibility to meet these standards.
Comcover cannot determine whether the agency should accept the indemnity
conditions. Comcover’s consideration is whether the agency’s policy can be
extended to cover the indemnity based on the information provided by the
agency. The issue for Comcover is whether the risk is insurable.

Materiality

Agencies should not submit every contract indemnity. It is only indemnities
that impact on the agency’s insurance coverage with Comcover that need to
be referred.

Considerations for Comcover

Comcover will take into account a number of issues when considering
extending an agency’s policy to cover an indemnity.

 Is the event that triggers the liability an insurable event?

   uninsurable events would be
     calls on warranties and guarantees
   excluded policy events would include
     breach of contract, war, terrorism

 Is the risk is an insurable risk, and should Comcover carry the risk?

   Comcover needs to determine if the indemnity represents an insurance
risk that can be shared by the fund as a whole, or due to the nature of the risk
or its potential exposure, the risk is more appropriately retained by the
agency within its budget.
    As an example, saythe Government required an agency to organise
and authorise distribution of a partly tested vaccine due to a serious
community health risk. The manufacturer of the vaccine is not prepared to
release the vaccine to the Public unless the Government is prepared to
indemnify the manufacturer against any and all liability resulting from the use
of the vaccine. There is no alternative vaccine available. The indemnity is
issued due to the serious nature of the health risk and the lack of a viable
alternative. The financial exposure is potentially catastrophic, and therefore
most appropriately funded by the Budget not the Comcover fund.




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 Does the risk form part of the agency’s core business?

   ( A ) The scenario of Professor Numna is a good example and would be
given favourable consideration by Comcover for the following reasons –

      The fact that commercial insurance has not been obtained by
  Professor Numna is not due to adverse risk exposure;
      Having retired, Professor Numna would not be considered to belong
  to an active commercial organisation seeking Government work;
      Professor Numna is a highly qualified specialist who as a retiree may
  find it either-
     (a) very difficult or
     (b) cost prohibitive to obtain PI Insurance;
      Professor Numna is to be engaged in a field that is considered core
  business of the fund member; and
      Comcover would assess the risk as being remote. In fact Prof Numna
  would be performing duties that could be considered to be similar to an
  agency’s normal qualified technical employee.

   ( B) An example with a different outcome would be –

      An agency has contracted an Australian company to construct a
  building in a neighbouring country. The builder maintains it cannot obtain
  insurance and will not start the project until it has an indemnity from the
  Commonwealth. The agency did not seek proof of adequate insurance as
  part of the tender evaluation process.

  Other Australian companies are engaged in building activities in the same
  country and have been able to obtain Contractors All Risk insurance. It
  would be considered normal for such organisations to carry this insurance,
  to cover their liabilities and assets whilst the building is under construction.
  It is also normal practice to extend these policies to cover the principal for
  its liabilities relating to the construction risk. It is possible the builder did not
  factor in the high insurance premium costs or is unable to obtain insurance
  due to its insurance claims history.

   In this instance Comcover would not extend the agency’s policy to cover
the indemnity for the following reasons:
      the activity does not form part of the agency’s core business;
      it is unlikely the Indemnity Guidelines would be met; and
      the Commonwealth should not be indemnifying the liabilities
  pertaining to a commercial contractor that should have its insurances in
  place.




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Timing

Fund members should refer indemnity submissions to Comcover after it has
complied with the Indemnity Guidelines and preferably before the contract has
been signed. Upon submission to Comcover the agency should allow seven
business days for a response. More time may be required if the request has
implications for Comcover’s reinsurance program.

Supporting Material

The following documentation should be provided to Comcover when
requesting an extension of the policy to cover an indemnity. This
documentation should be readily available from the contract approval process.

 The relevant contract clauses.
 The agency is required to submit only the clauses of a contract detailing
the indemnity provision and not the document as a whole.
 A risk management report recording the reasons why an indemnity
should be issued and identifying the physical and financial exposures to your
agency as a result of issuing the indemnity.
 The risk management report is to identify the physical and financial
exposures to the agency should the indemnity be granted. Again this report
should relate to the INDEMNITY ONLY not the whole contract.

 Legal advice as to the potential exposure of the fund member should
indemnity be granted.
 Legal advice concerning the contract as a whole is not required. Legal
advice is not a requirement, but a should be provided to Comcover if it has
been obtained.

 A determination accepting inclusion of the indemnity within the contract.
 Provide the internal report(s) recommending the acceptance of the
indemnity, and the signed acceptance if this process has been completed.

On receipt of appropriate and complete documentation, Comcover will
consider providing cover for an indemnity. In some cases, the extent of cover
provided may be limited and/or an extra premium payable depending on the
risk exposure.




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