The Public Governance, Performance and Accountability Act 2013 (PGPA Act), which commenced in July 2014, ushered in a renewed focus on governance and accountability of public resources, including the requirement for the majority of Commonwealth entities to establish systems of risk oversight and internal controls. The Commonwealth Risk Management Policy, which also commenced in July 2014, supports Commonwealth entities with their obligations under the PGPA Act in relation to engaging with, and the management of, risk. It is imperative that risk be considered when the Commonwealth is looking to enter into contractual arrangements, however, risk can be easily overlooked or underestimated unless appropriate steps are taken to identify, analyse and evaluate it. The feasibility of a contract is always affected by the risk contained within it and risk should be considered when evaluating a contract's total price.
The PGPA Act outlines three legally enforceable obligations which may be included in contractual arrangements between the Commonwealth and another party – indemnities, guarantees and warranties. These are collectively referred to as indemnities within Australian Government guidance.
- An indemnity is a legally binding promise whereby the Commonwealth undertakes to accept the risk of loss or damage another party may suffer.
- A guarantee is a promise whereby the Commonwealth assumes responsibility for the debt, or performance obligations of, another party on default of its obligations.
- A warranty is a promise whereby the Commonwealth provides certain assurances to the other party to an arrangement.
Under section 60 of the PGPA Act, the Finance Minister may grant an indemnity on behalf of the Commonwealth. The Finance Minister has delegated this power, with directions limiting the exercise of the power, to accountable authorities of non-corporate Commonwealth entities. However, the Finance Minister has not delegated the power to enter into loan guarantees.
The requirement to seek the Finance Minister's approval to grant an indemnity does not apply to corporate Commonwealth entities, including Commonwealth companies.
Comprehensive guidance in relation to the granting of indemnities under the PGPA Act is provided in Resource Management Guide-414: Indemnities, guarantees or warrantees granted by the Commonwealth.
Comcover Statement of Cover
Section 18(3) of the Statement of Cover advises what cover is automatically provided in respect to indemnities. This section of the Statement of Cover provides that Comcover will not pay for liability arising out of any indemnity unless:
- the liability would have arisen in the absence of such indemnity (for example, under common law); or
- the indemnity is contained in a contract where the contract was entered into prior to 1 July 2004; or
- the Fund member has followed Australian Government guidance on the issuing and managing of indemnities contained in Resource Management Guide-414 – Indemnities, guarantees or warranties granted by the Commonwealth and, after making reasonable inquiries, you have assessed:
- the likelihood of the event giving rise to the liability occurring is less than 5%; and
- the most probable expenditure that would need to be made if the event giving rise to the liability occurred is less than $5,000,000.
If the above conditions are met, the insurable risks in respect to the indemnity are covered by the Statement of Cover.
What does a Fund Member need to do where the indemnity does not fall within the conditions stated in Section 18(3) of the Statement of Cover?
Where the assessed exposure exceeds any of these thresholds and you would like Comcover to consider extending cover for the insurable liabilities associated with the indemnity (or indemnities) you have given, then you must provide Comcover with the following information for their consideration:
- Contract clauses of the indemnity, plus all other relevant clauses;
- Legal advice which specifically addresses the additional risks you have assumed by granting this indemnity. Comcover is only interested with insurable risk, but the legal advice should show all the extra risks you are accepting by giving the indemnity;
- Risk assessment, Comcover only needs to see the part of the risk assessment on the additional risks you are accepting by giving the indemnity. Your risk assessment should show the consequence of each risk in dollar terms; and
- any other supporting information on the reasoning behind the proposal to grant the indemnity.
All Commonwealth contracts are generally required to include a clause in relation to the liability of the supplier should actions of the supplier result in any claim, loss or damage arising in connection with any breach of the supplier's obligations or representations under a contract. Contracts will generally require a supplier to maintain adequate insurances for the period of the contract, and may cap the liability of the supplier.
Information in relation to appropriate risk assessment and mitigation considerations, and liability caps, is provided in Resource Management Guide-414: Indemnities, guarantees or warrantees granted by the Commonwealth and the Department of Finance's Procurement webpage.
Important information and links
- Ashurst publication - Insurance Requirements for acquisition and Service Contracts
- PGPA Act legislation and associated instruments
- Resource Management Guide-414 –Indemnities, guarantees or warranties granted by the Commonwealth
- Comcover Indemnities Fact Sheet
- Comcover Indemnities Fact Sheet
Comcover Indemnity and Insurance Clauses Seminar Presentations Slides
|Indemnities under the Public Governance, Performance and Accountability Act 2013||Director - PMRA Implementation Branch||Department of Finance|
|Indemnities and Insurance Clauses
|Relationship Manager - Comcover||Comcover|
|Indemnities in Commonwealth contracts||Mr Steve McKinney, Partner - Ashurst||Ashurst|
|Insurance issues in contracts||Ms Rehana Box, Partner - Ashurst||Ashurst|