In the building industry, insurers often require builders to sign a counter indemnity as a prerequisite to the provision of insurance. What do builders need to know about this?
A counter indemnity effectively indemnifies the insurer against any losses that it may sustain that emanate from the builder’s acts, errors or omissions. Whoever signs the counter indemnity in effect becomes the insurer’s indemnifier.
A counter indemnity is very much like a personal guarantee where the guarantor with respect to a bank loan guarantees the obligations of the borrower. And like a personal guarantee, it provides a very robust level of security for the beneficiary of the counter indemnity.
Below is an extract from the wording in a typical counter indemnity.
“We hereby agree to indemnify you the insurer for any costs, expenses, claims of whatsoever nature that either directly or indirectly emanate or flow from this counter indemnity. Furthermore you will pay any such sums or expenses immediately upon demand and…”
As you can see, the wording leaves no stone unturned in terms of its broad scope and purchase. and it pretty much gives the insurer carte blanche.
Natural persons (i.e. human beings) be they directors, sole traders or partners, are generally required to execute the counter indemnities. Ordinarily the insurer will want to be satisfied that there are assets or means by which the counter indemnity can be forced against tangible items of value.
In circumstances where an indemnifying event occurs (i.e. the disappearance or insolvency of the contractor) and the insurer is compelled to pay out a claim and associated expenses pursuant to the counter indemnity, the insurer will seek to claw back that which it has paid out. It is fair to say that whoever signed the counter indemnity in such circumstances will be in a parlous position.
One key difference between the operations of personal guarantees and counter indemnities is that when banks obtain a personal guarantee, they generally require that a solicitor’s certificate is executed with respect to the guarantee. The purpose of this is to ensure that the solicitor has explained the terms of the guarantee and the legal and security gravitas that attaches to it.
Solicitors tend to take their time and considerable care when they explain the intricacies of personal guarantees and the ramifications of same, and they will charge for this. Indeed solicitors have made a point of taken their time with their advice because if they are slapdash in terms of their explanation of the import of a guarantee, they could be fitting themselves up for a lawsuit in negligence. As counter indemnities are of similar persuasion, before a punter executes a counter indemnity he/she should get a solicitor to explain precisely what it means and what may be “up for grabs.”
It is a sad situation where a counter indemnity is called up. Sad because a consumer will have encountered the difficulties and challenges of a housing debacle. Sad because both builder and owner will have invariably fallen out of favour and will have become embroiled in a building dispute. In this case, it would be very difficult for the ‘”indemnifier” (i.e the contractor) to defeat the potency of the counter indemnity. Counter indemnities, like personal guarantees, are very carefully drafted, tight in their legal wording and semantics and expansive in terms of their securitisation net.
So before you sign a counter indemnity, get some advice from an experienced old hand in the law so you know precisely what you are taking on board.