Picture a hypothetical. A delivery driver slips on ice outside a leased warehouse on Airport Road and sues the landlord. The landlord’s lawyer pulls out the lease, in which the tenant agreed to indemnify the landlord for injuries on the premises and to carry liability insurance naming the landlord. The tenant thought the lease was mostly about rent. Now it matters a great deal whether that promise and the tenant’s insurance policy match.
Indemnity and insurance clauses usually sit near the back of a contract, and they get skimmed. Yet these are the provisions that decide who ultimately pays when something goes wrong, sometimes for amounts much larger than the contract is worth. A $10,000 service contract can carry an uncapped promise to pay for someone else’s multimillion-dollar loss.
This article explains in general terms how those clauses work in Ontario business contracts. It is not legal advice, and it is not insurance advice. Your broker should see any clause that materially changes your risk, and your lawyer should see it before you sign.
Two Different Promises
An indemnity is a contractual promise by one party to cover another party’s specified losses. It is only as good as the party making it. If that party has no money, the promise may be worth little.
An insurance clause requires a party to buy and maintain particular coverage. It gives the indemnity something to stand on, but it is a separate promise. Failing to carry the required policy can be its own breach, and insurance doesn’t automatically respond to everything you have promised under the indemnity.
Here is the point that most surprises business owners: insurance is a contract between you and your insurer, and your customer’s contract does not change it. If you promise a customer something your policy excludes, you still owe the customer. You just owe it from your own pocket.
What an Indemnity Actually Covers
Most clauses read something like “Party A shall indemnify and hold harmless Party B from all claims, losses, damages and expenses arising out of or in connection with this agreement.” A few of those words carry a lot of weight:
“Arising out of or in connection with.” These words are broad. A clause tied to “the negligence of the Contractor” is much narrower than one tied to anything connected with the work. If you are giving the indemnity, try for the first. If you’re receiving it, you would want the second.
Whose fault? A very broad clause may require you to pay even when the other party caused part or all of the loss. Courts look for clear wording before reading a clause that way, but you shouldn’t count on a court to rescue you. Ask for a proportional clause: each party bears losses to the extent caused by its own fault.
Third-party claims or direct losses? An indemnity may cover only claims brought by outsiders, such as an injured visitor. Or it may also cover the other party’s own direct losses, which turns the clause into a wide route for ordinary breach of contract claims, sometimes bypassing limits that would otherwise apply.
“Hold harmless.” People often treat this as a synonym, though some argue it adds a protection against being sued for the loss. Don’t rely on the phrase to do the work. Spell out what you mean.
Legal fees. A clause might cover “legal costs on a full indemnity basis,” which is often much more than a court would typically award in costs. If that’s what you agreed, then that’s what you may owe.
Who is protected? Check whether the clause extends to the other party’s affiliates, directors, employees, agents and subcontractors. That can widen the circle of people you have promised to protect.
Duty to Defend Is a Separate Obligation
Some clauses go further and require you to “defend” the other party. That is a very different promise from reimbursing a loss after the fact, because you must fund the defence as the claim goes along, whether or not the claim eventually succeeds.
In the insurance setting, Canadian courts treat the duty to defend as broader than the duty to indemnify. In Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, the Supreme Court of Canada described a process in which the pleadings are read to see whether a claim could possibly fall within coverage, with the insurer then having to show that an exclusion clearly applies. A contract clause isn’t an insurance policy and is interpreted on its own terms, but the case does show how the defence question gets decided early, based on what’s alleged rather than what’s finally proven.
If your contract requires you to defend, say who picks the lawyer, who controls settlement and who must cooperate. Otherwise you may be funding a defence with no say in how it runs, and your insurer may have its own conditions about control of the claim.
How an Indemnity Interacts With a Liability Cap
Many contracts also have a limitation of liability clause capping damages at, for example, fees paid in the last 12 months. Read the two provisions together. A common carve-out reads, “This limit does not apply to a party’s indemnification obligations.” If the indemnity is broad, this carve-out can swallow the cap and leave the supposedly limited party with unlimited exposure.
Negotiation often lands somewhere in the middle: third-party bodily injury and property damage claims stay uncapped or capped at insurance limits, while other indemnified losses stay within a higher “super cap.” Tying the cap to the required insurance limits can give both sides a realistic figure. Have your commercial contract reviewed with this interaction in mind, not clause by clause in isolation.
The Insurance Clause, Line by Line
A complete clause usually names the types of coverage, the minimum amounts and any conditions. Common types include:
- Commercial general liability (CGL): bodily injury and property damage to third parties
- Automobile: essential for any business with vehicles, and CGL typically excludes auto risk
- Professional or errors and omissions: financial loss caused by advice or professional services, usually not covered by CGL
- Cyber: data breaches and related costs, increasingly requested by larger customers
- Property and business interruption: your own premises, equipment and lost income
- Cargo or warehouse legal liability: relevant to the many logistics operators around Brampton
Ask your broker these questions about any clause:
- Does my current policy meet the required limit, and is the limit per occurrence or aggregate?
- Does the policy include contractual liability coverage? Many CGL policies cover some assumed liability, subject to exclusions, but not every promise you make.
- Are any of the listed risks excluded, such as pollution, professional services, or work in certain locations?
- What deductible would I bear, and does the contract make me responsible for it?
- If the contract needs coverage to continue after the work is done, can I maintain it?
Be careful about claims-made policies, which are common for professional and cyber coverage. These generally respond only if the claim is made during the policy period, so a contract demanding coverage for two years after completion needs you to keep the policy, or similar coverage, in place.
Additional Insureds and Certificates
Being named as an additional insured gives another party some rights under your policy, usually limited to liability arising out of your operations. It is different from merely being told that insurance exists. The extent of those rights depends on the endorsement’s actual wording.
A certificate of insurance is evidence that a policy existed when the certificate was issued. Generally it is only a summary and doesn’t change the policy’s terms. Many certificates say exactly that on their face. If you are relying on someone else’s insurance, ask for the endorsement as well, track the expiry date and diarize a renewal request. Getting a certificate in the first week of a three-year contract says nothing about year two.
Contracts often require 30 days’ notice of cancellation. Not all insurers will commit to giving that to a third party, so the promise may have to come from the insured rather than the insurer. If you’re asked for it, check with your broker.
Waivers of Subrogation
When an insurer pays a claim, it generally steps into the insured’s shoes and can sue whoever caused the loss. That is subrogation. In a commercial lease or construction contract, a waiver of subrogation means the insurer can’t come after the other party.
Consider a hypothetical fire at a Brampton industrial unit, started by a tenant’s careless employee. If the lease has the landlord insuring the building, with the tenant paying a share of premiums and getting a release or waiver, the landlord’s insurer might not be able to recover from the tenant. Without that language, the tenant may end up facing a very large claim. Courts have considered such covenants carefully, and the result depends on the wording. Tell your insurer if your contract contains this kind of waiver, since some policies restrict you from giving up recovery rights without the insurer’s permission.
When Something Actually Happens
Three practical points are worth keeping in mind:
Report early. Policies have notice conditions, and late notice can jeopardize your coverage, even though Ontario law allows relief from forfeiture in some cases. Tell your broker about any incident or demand that might lead to a claim, not only when a statement of claim arrives.
Send a proper indemnity notice. Contracts commonly require prompt written notice of an indemnity claim to a named address. Follow it to the letter, keep proof of delivery and give the other side the chance to take up the defence. Our business litigation page describes the disputes that can follow.
Don’t settle alone. Admitting liability or settling without the insurer’s or the indemnifier’s consent can compromise your right to recover. Keep your communication factual until you have advice.
Time limits matter as well. Ontario’s Limitations Act, 2002 generally gives two years from discovery of a claim. A specific rule applies to contribution and indemnity claims between wrongdoers: the period generally runs from the day the first alleged wrongdoer was served with the claim. Where the indemnity comes from a contract, working out when the clock started can be contestable, and certain business agreements can vary the limitation period. So if you think you have a right to indemnity, notify the other party promptly and get advice about the deadline. Ontario’s Negligence Act separately deals with contribution among people at fault, which means some sharing may occur even without any contract.
A Few Situations Worth Extra Care
Commercial leases. Tenant indemnities can extend to common areas, and insurance clauses often make a tenant cover a landlord’s premium increases. Look at who insures what, including leasehold improvements.
Construction and trades. Upstream contracts may push indemnity obligations down to subcontractors. Before you sign, check whether you’ve taken on a general contractor’s risk for work that isn’t yours.
Vendor and technology contracts. Suppliers often offer only an intellectual property indemnity and no data breach coverage. If they hold your customer data, ask about cyber coverage and what happens if there is an incident.
Small business customers of bigger companies. Large organizations often present their standard terms as non-negotiable. Even so, you can often negotiate the fault language, a cap, or an insurance limit if you raise the issue early and explain what your insurer will accept.
Personal guarantees and directors. Don’t assume that incorporating ends the concern. A guarantee may back the corporation’s indemnity, leaving you personally exposed.
A Simple Review Habit
Each time a significant contract comes in, read these four parts together: the indemnity, the limitation of liability, the insurance clause and the termination section. Summarize them in one or two sentences, such as “We pay for any injury or property damage connected with our work, up to no limit, and must carry $5 million in CGL.” Then send that sentence to your broker. If the broker tells you the policy wouldn’t cover it, you have three options: renegotiate, buy more coverage, or accept the risk with your eyes open.
Keeping a register of what you’ve promised across contracts also helps at renewal, since you can tell your broker what you need. We can review these provisions as part of our corporate law work, and you can contact us if a contract in front of you carries obligations you’re uneasy about. The goal is to know, before anything happens, who pays and from what source.