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Indemnity clause (building contract)

An indemnity clause shifts loss from one party to another. A broad clause can transfer risks far beyond what the indemnifier's insurance covers. Read carefully.

By Chalkline. Last updated 29 May 2026. Verified 29 May 2026.

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An indemnity clause is a contract provision where one party agrees to compensate another for specified losses. In building contracts it typically appears with the subcontractor or supplier as the indemnifier and the head contractor or principal as the indemnified. The risk is the scope: a broadly drafted indemnity can transfer losses the indemnifier never caused directly and that the indemnifier’s insurance does not cover.

What it shifts

  • Liability sits where the law puts it (usually with the party at fault).
  • Indemnity moves liability by agreement, often regardless of fault.

“Subcontractor indemnifies Head Contractor against all claims, costs and losses arising out of or in connection with the Works” reaches well beyond what the subcontractor caused. “In connection with” and “however arising” are the broadening hooks.

Three risk dimensions

  1. Scope of loss. Property damage and personal injury are normal. Pure economic loss, delay, consequential loss, regulator fines: carve in or out.
  2. Causation. “Caused by” is narrow; “arising out of or in connection with” is broad; “however arising” is broadest (no-fault).
  3. Cap. Without one, liability is unlimited. Typical negotiated cap: contract value or PL limit.

Insurance gap

The trap. Policies (PI, PL, construction works) respond to insured perils within exclusions and limits. An indemnity reaches further. Where the indemnity covers a loss the policy excludes, the indemnifier pays from balance sheet. Common gaps: consequential loss, regulator fines, pre-existing damage, progressive deterioration.

For a builder

  • Read the indemnity before you sign. Biggest risk transfer in the contract.
  • Negotiate caps and carve-outs. Contract value or PL limit. Carve out consequential loss, fines, pre-existing damage.
  • Match insurance to indemnity scope. Broader indemnity than policy = you carry the gap. Brief the broker before signing.

Category: Contracts / risk allocation.

See also

Last updated: 2026-05-29. Verified: 2026-05-29. Quarterly review for currency.

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