Typically, though not automatically, found within liability insurance policies, an indemnity to principal clause is used to protect the principal. It does this by outlining that should a claim occur, the payment can be made to the third party who has suffered the loss, whether that’s an injury or damage, as opposed to the policy holder.
Principals are normally the end client, though sometimes they’re the contractor who engaged you for the work on their client’s behalf. For this reason, we thought we’d set the record straight on indemnity to principal clauses, and what they mean for you.
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How does it work?
Effectively, an indemnity to principal clause allows for the end principal (the client for example) to be indemnified following a loss, rather than the policyholder. This means that they will benefit from payment, not you.
Without the clause, any claim payments go directly to the insured – even if only the principal has suffered a loss. This could delay the principal being indemnified, or create a situation where the insured withholds the funds. Obviously, this would result in conflict, as well as a potentially lengthy and costly litigation.
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With the clause, however, the principal has the comfort that in the event of a loss, they can be restored to their pre-loss position – without the fear of the policyholder acting as a barrier to them being indemnified.
Where is it used?
It’s a common requirement for contractors working in construction. But any contractor (within any industry) may need to adopt an indemnity to principal clause. As a broker, we’ve seen it requested within a whole host of sectors, from technology through to entertainment.
The clause tends to be found within your Public Liability policies. This is to be expected, given that it extends liability coverage to the principal, as well as you.
Will it automatically be in my policy?
No. It varies from insurer to insurer and product to product. Some insurers choose to include it within the policy wording. Others require it to be added by way of a policy endorsement on a case-by-case basis, so never assume it’s included.
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If you’re ever unsure, we suggest carefully checking all documentation or querying it with your provider or broker. If you don’t, you could be breaching a contract, especially if your client requests that you have this policy in place.
How we can help
Riskbox helps both contractors and businesses better understand their insurance needs. Our experts can explain whether you’re required to have an indemnity to principal clause, and steer you towards implementing it.
As independent insurance specialists, we see countless examples of missing clauses harming the relationship between clients and contractors. That’s why we’d always recommend investigating whether or not your contracts fully cover you from any fallout.
Do you think your contracts could use a second pair of eyes? Get in touch with us today on 0161 533 0411 or by emailing [email protected].
Photo by Maranda Vandergriff on Unsplash
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