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InsuranceIndemnitiesPerformance Guarantees


  • pg 1
                                       CAPITAL TERRITORY


 Insurance/Indemnities/Performance Guarantees
        Procurement Circular 2002/XX
            This circular has been issued by the ACT Government Procurement Board

                                                   Before any decision is made on
                                                   capping or limiting liability, advice is
This Circular outlines the requirement
                                                   to be sought from the Government
to protect the interests of the Territory
                                                   Solicitor’s Office and the ACT
whilst still achieving value for money
                                                   Insurance Authority (ACTIA).          It
and ensuring that risk is minimised in
                                                   would be advisable to seek advice
government procurement activities
                                                   from the Solicitor on the wording of
through       appropriate      insurance,
                                                   any indemnity prior to the tender
guarantees and indemnities.
                                                   process to ensure that it achieves the
Indemnity Clause                                   objectives of the Government.
An indemnity clause is a guarantee by              Insurance
one party to protect the other party
                                                   Insurance ensures that adequate
against the cost of claims for loss or
                                                   monies are available to meet any costs
liabilities arising out of a contract.
                                                   that might be required from the
The aim of indemnity clauses should
be for the Contractor to indemnify the
Territory without limit. The general               When         assessing      insurance
principle is that the risk should be               requirements the main issues that need
with the party who can best manage                 to be considered are:
the risk.                                          a) what type       of insurance(s)    is
A Contractor is liable for their actions              required
and consequences of those actions                  b) how much ($ amount) insurance is
under common law.           Use of an                 required
appropriate indemnity clause clearly
allocates risk to the Contractor and has           c) what period should the insurance
the effect of making the Contractor’s                 be in force
indemnity subject to contract law.                 Type of insurance and amount
Advice      from     the    Government
Solicitor’s Office must be sought prior            Insurance can take many forms and
to any legal action being taken against            depends on the nature of the
a Contractor.                                      procurement activity. For example a
                                                   company that stores records may need
The Territory has a standard position              special insurance to cover the
of not allowing the capping of liability           restoration of documents. The most
by contractors. Any consideration to               common types of insurance are:
cap or limit liability is only be
considered where there are extremely
strong grounds for such consideration
and must be on a per event basis.
Public Liability Insurance                     would be considered an appropriate
Public liability insurance provides
protection against the cost of claims
that one is legally liable for, for
                                               Workers Compensation Insurance
accidental loss or damage to third
party property, and accidental death or        Workers Compensation insurance is
illness caused to third parties.               mandatory for Contractors under
Insurance should, unless there are             Territory legislation. Although it is
good reasons to justify a lower                required by law, this type of insurance
amount, be for a minimum of $20m.              must be specified in the Contract.
Some contracts will require higher             Other types of insurance include:
levels of insurance.            Where
appropriate the Territory should be             Motor Vehicle insurance
nominated as a joint insured in the             Mobile and Power Plant
                                                Asset Insurance and
Products Liability                               Consequential Loss (often called
Normally automatically covered under             Industrial and Special Risk)
public liability insurance covers.              Inherent Defect – Structural
Covers the risk of claims and costs              Guarantee Insurance
from third parties arising from the
faulty manufacturing of products.               Principle Arranged Insurance
This insurance does not cover liability         Medical indemnity insurance if
arising from faulty design or advice –           the contract involves the use of
refer    to   Professional    Liability          medical or surgical procedures.
insurance. If it is not automatically
covered     under    public    liability
insurance coverage for an equivalent            Every Contractor is required to have
amount      would    be     considered                      insurance
  Professional Liability (Indemnity)
             Insurance                         Insurance Period

Professional Liability (Indemnity)             Insurance is to be in place prior to the
insurance covers liability arising from        commencement of any contract.
a negligent act, error or omission             Insurance needs to run continuously
which includes advice, design,                 for the life of the contract and, for
supervision, statement of a hands on           professional indemnity insurance in
error which causes financial loss. All         particular, it may be appropriate for it
contracts for consultancy services             to run for a set period after the end of
should include the requirement for the         the contract.
consultant to have Professional
Liability     (Indemnity)    Insurance.
                                               Performance Guarantees
Premiums for Professional Liability
                                               Performance and/or security
(Indemnity) insurance are higher than
                                               guarantees may be appropriate to
public      liability    so      careful
                                               incorporate into contracts to ensure
consideration should be given to the
                                               proper performance of the contract.
level required, although a $5m cover
                                               Guarantees can be used where a
for a normal consultancy contract
                                               company’s financial viability is

uncertain and/or additional financial
incentives are seen as desirable to
ensure the Contractor satisfies the
contractual requirements

Types of Guarantees include:

Parent Company guarantee – the
parent company(s) guarantees the work
of the Contractor. It is important if
obtaining a parent guarantee to ensure
that the parent company is made
legally liable and has the financial
ability to meet any possible debts or
warranties created by the Contractor.

Unconditional undertaking/Bank
Guarantee An undertaking issued by
a Bank to pay the Territory upon
demand. Bank guarantees are at a cost
to the Contractor and should be used
where appropriate and set for an
amount that is appropriate

Cash Security – Cash or cheque
lodged by the Contractor with the
Territory and returned upon successful
completion of the contract. Cash
guarantees are at a cost to the
Contractor and should be used where
appropriate and set for an amount that
is appropriate

Liquidated Damages

Liquidated damages are a specified
amount of damages and are
recoverable from the Contractor if the
Contractor fails to meet contractual
requirements. The amount of
liquidated damages is a genuine pre-
estimate of the damage that would
occur if certain milestones are not

        Where appropriate,
  performance/security guarantees
   should be sought to protect the
        Territory’s interests

Useful Contacts
                                          Procurement guidelines and circulars
  ACT Insurance Authority
                                                  issued by the Board
  Level 8
  197 London Circuit
                                          Procurement Guidelines
  Canberra ACT 2600
                                          2002/01 Government Procurement
                                          (Approved Procurement Units)
  Telephone:       (02) 6207 0268
  Facsimile:       (02) 6207 0267
                                          2002/02 Government Procurement
                                          (Principles) Guideline
  Procurement Policy
  Department of Treasury
                                          Procurement Circulars
  Dame Pattie Menzies House
                                          2001/04 Approved Procurement Units

  Telephone:       (02) 6207 5876
  Facsimile:       (02) 6205 5468

  Buyers & Sellers Information
  Telephone:     (02) 6207 7377
  Facsimile:     (02) 6207 0301

  ACT Government Solicitor
  Level 1, GIO House

  Telephone:     (02) 6207 0655
  Facsimile:     (02) 6207 0630


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