Considerations before granting an indemnity

An official must ensure that the:

Risk management arrangements are appropriate to the complexity and potential costs of the indemnity are in place before entering, after entering and for the duration of the arrangement.

Legislative requirements under the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and the delegations (of the Finance Minister and the accountable authority) are satisfied. 

Officials are encouraged to consider:

• whether there is an explicitly identified risk, and that indemnities are not issued simply to provide comfort against general, unspecified events:

For example, where an indemnity is provided for ‘damage to property’, it is generally better practice to specify that only damage caused by the non-corporate Commonwealth entity's (NCE) use is covered, so as to expose the Commonwealth to minimum risk.

• whether alternatives, such as the use by the other party of commercial insurance, are appropriate,
• that the indemnity does not cover damages resulting from acts by an indemnified person which are malicious, fraudulent, wilful, or reckless,
• whether including a requirement that the indemnified party advise the Commonwealth of relevant information is appropriate,
• whether the proposed indemnity may set an undesirable precedent in an industry, particularly where there is little competition,
• whether the potential cost will be funded from existing resources or from insurance provided by Comcover, this may require:
  • discussing the proposed indemnity with Comcover or
  • if funding cannot be met from existing resources, it may be necessary to request additional funding through the Budget process (this will involve identifying the most probable total cost and the price of the risk to the Commonwealth excluding any potential insurance claims)
• including a maximum financial limit on payments or claims (the express inclusion of a maximum financial limit can be an important mechanism to protect the position of the Commonwealth),
• including a time limit, noting that options to extend time limits may be appropriate in certain circumstances, but officials are encouraged not to commit the Commonwealth longer than necessary,

For example, claims may only be able to be made during the term of the arrangement, so these arrangements are preferably not open-ended.

• whether the arrangement will explicitly reserve the right for the Commonwealth to terminate the arrangement when it is no longer needed,
• whether subrogation and notification clauses need to be included in an indemnity. If needed, the arrangement could include subrogation clauses (clauses providing the Commonwealth with the right to exercise the option of conducting, or participating in, the defence of any claims against the indemnified party, and to require full assistance from that party) and clauses giving the Commonwealth the right to take over any litigation related to the indemnity.

An accountable authority wants to establish streamlined processes for officials entering routine arrangements for venue hire. Venue hire arrangements typically contain indemnity clauses covering damage while being used by the hirer.

The accountable authority sub-delegates their power under section 60 of the PGPA Act to all officials that have the power to enter into arrangements (that is, subsection 23(1) delegates) where the chance of triggering the indemnity is assessed as remote and the most likely cost, if a contingent event occurs, would be less than, $5 million. This will mean that when considering entering into arrangements, subsection 23(1) delegates can also use their powers under section 60 of the PGPA Act to grant the indemnity.

The accountable authority may also provide a checklist in relation to venue hire, through the internal controls of the entity, to guide officials with a delegation to grant an indemnity and a delegation to enter an arrangement.

That checklist may set risk parameters such as:

• the venue is within Australia
• the function will be attended by fewer than 150 people
• the venue is to be used for the purposes of events attended by public servants and/or reputable external people
• the likelihood of antisocial behaviour is remote
• where subcontractors are engaged, the services provided are limited to the provision of facilitation services, scribing services, catering services or the provision of audio/visual services
• the contract does not provide an indemnity that would expressly meet the costs of civil or criminal penalties of the indemnified party.

The accountable authority may also decide to provide risk mitigation strategies as part of their internal controls, such as:

• officials granting an indemnity are encouraged to vet attendees
• officials are encouraged to advise attendees that they are responsible for their personal equipment and ensure adequate physical security of valuable equipment
• officials are encouraged to ensure there is appropriate security at the venue
• officials are encouraged to ensure alcohol service (if included) is controlled
• officials are encouraged to incorporate contingent liabilities into subcontractor arrangements (where applicable) and ensure the use of reputable subcontractors.

All NCEs are insured against losses for normally insurable risks by Comcover (other than worker’s compensation which is the responsibility of Comcare). Prior to entering into any arrangement that includes an indemnity, entities need to be aware of, and follow, the terms and conditions outlined in the Comcover Statement of Cover.

If officials are considering a proposed indemnity involving a contingent liability above any liability cap in the Comcover Statement of Cover, they are strongly encouraged to discuss it with Comcover prior to granting the indemnity. Comcover can provide support and advice to entities on how best to manage these risks by contacting Comcover or calling 1800 651 540.