Signing a contract is part of doing business, especially in industries like construction, trades, transport, and professional services.
But here’s the problem:
Not all contract risks are covered by insurance.
Many business owners assume that if something goes wrong, their policy will step in.
In reality, certain contract terms can override or fall outside your insurance cover entirely, leaving you exposed to risks you didn’t even realise you accepted.
If you’re signing agreements with clients, builders, suppliers, or head contractors, understanding these risks is critical.
Why Contracts and Insurance
Don’t Always Align
Insurance policies are designed to cover specific types of risk based on standard legal liability.
Contracts, on the other hand, can:
- Transfer risk between parties
- Expand your liability beyond normal legal responsibility
- Introduce obligations your insurance wasn’t designed to cover
That’s where the gap appears.
Just because you’ve agreed to something in a contract doesn’t mean your insurance will cover it.
“Hold Harmless” Clauses:
The Hidden Risk Transfer
One of the most common (and dangerous) clauses found in contracts is the “hold harmless” clause.
What Is a
Hold Harmless Clause?
It’s a clause where you agree to:
- Take responsibility for certain risks
- Protect another party from claims or losses
- Indemnify (compensate) them if something goes wrong
In simple terms:
You’re agreeing to carry someone else’s risk.
Why This
Can Be a Problem
Let’s say:
- You’re a subcontractor on a job
- You sign a contract with a hold harmless clause
- Something goes wrong, even partially outside your control
You may be required to:
- Cover damages
- Pay legal costs
- Defend the other party
Even if:
- You weren’t fully at fault
- The issue was caused by someone else
Will Insurance
Cover This?
Not always.
Many insurance policies exclude or limit cover for contractual liabilities that go beyond your normal legal responsibility.
So if you’ve agreed to take on additional risk via a contract:
- Your insurer may not fully respond
- You may be personally or financially exposed
Contractual
Liability Traps
Beyond hold harmless clauses, there are several other contractual traps that can impact your insurance.
1. Broad Indemnity Clauses
These clauses may require you to:
- Indemnify another party for a wide range of events
- Accept liability even when you’re not fully responsible
The broader the clause, the greater the risk.
2. Assumption of Responsibility Clauses
Some contracts shift responsibility to you for:
- Site conditions
- Other contractors’ work
- Delays or defects outside your control
Again, this may extend beyond what your insurance is designed to cover.
3. Waiver of Rights Clauses
You may unknowingly waive your right to:
- Recover losses
- Claim against another party
This can also affect your insurer’s ability to recover costs which can impact your claim.
4. Liquidated Damages Clauses
These clauses impose pre-agreed financial penalties for:
- Delays
- Failure to meet deadlines
Most insurance policies do not cover liquidated damages.
Why
Insurance ≠ Full Protection
This is one of the biggest misconceptions in business insurance.
- Insurance covers legal liability
- Contracts can create additional liability
If your contract makes you responsible for more than the law would normally require, your insurance may not follow.
Example
Scenario
You sign a contract agreeing to:
- Take full responsibility for all site damage
- Indemnify the builder for any related claims
A third party causes damage on-site.
Even if:
- You didn’t cause the issue
- You weren’t negligent
The contract may still hold you responsible.
Your insurer may then say:
- “This liability exists because of the contract, not your negligence.”
- “Therefore, it may not be covered.”
When to Get
Contracts Reviewed
One of the best ways to protect your business is to review contracts before signing them, not after something goes wrong.
You Should Consider
a Review When:
- The contract includes indemnity or hold harmless clauses
- You’re taking on a large or high-risk project
- You’re working with new clients or head contractors
- The contract seems “one-sided”
- You don’t fully understand the legal language
Who Should
Review It?
Depending on the situation:
- An insurance broker (to identify coverage issues)
- A legal professional (to assess contractual risk)
This small step upfront can prevent major financial exposure later.
Practical Tips
to Reduce Contract Risk
You don’t need to avoid contracts, but you do need to approach them carefully.
Understand
What You’re Signing
Don’t rush through contracts or rely on assumptions.
lign Contracts
With Your Insurance
Make sure your policy can respond to the obligations you’re accepting.
void Unnecessary
Risk Transfer
Push back on overly broad clauses where possible.
Keep Records
and Documentation
Clear documentation can support your position in the event of a dispute.
Are You Taking On More Risk
Than You Realise?
If you’re signing contracts regularly, it’s worth asking:
- Do I understand the indemnity clauses I’m agreeing to?
- Could my contract be expanding my liability?
- Would my insurance respond to these obligations?
- Have I ever had my contracts reviewed properly?
If you’re unsure, there’s a good chance there’s a gap.
Business Insurance Australia:
Protecting You Beyond the Policy
At Bunker Insurance, we don’t just look at your policy, we look at how your business actually operates.
That includes:
- The contracts you sign
- The risks you take on
- The gaps between insurance and real-world exposure
We help you:
- Identify contractual risks
- Understand what your insurance will (and won’t) cover
- Structure your cover to better align with your obligations
Talk to a Broker
Who Looks Beyond the Fine Print
Insurance is only one piece of the puzzle.
If your contracts are creating risks your policy doesn’t cover, you could be exposed without realising it.
Book a chat with a Bunker Insurance advisor today and make sure your business is protected, not just on paper, but in practice.
