Cover Is Not Consent: When Contractual Risk Outruns the Insurance Programme

A board approves an indemnity because the contract looks balanced. The insurance schedule is assumed to follow. It does not. A policy is a separate contract, written for underwriters’ purposes, and it will respond only on its own terms. The gap between what a company has promised and what its insurers have agreed to cover is rarely visible at signature. It becomes visible when a claim arrives.

The indemnity is a promise, not a policy

An indemnity is a contractual promise to make good another party’s loss. It creates exposure. Insurance is a separate mechanism that may, or may not, fund that exposure. The distinction matters because many liability policies contain a contractual liability exclusion. Public liability and professional indemnity wordings commonly exclude liability assumed under contract unless it would have arisen independently of the contract, or unless the extension is specifically purchased.

The result is familiar. A supplier agrees to indemnify a customer for regulatory penalties, consequential loss or damage to the customer’s property. The clause is commercially sensible in the negotiation. The policy, however, may exclude fines and penalties, may exclude consequential loss, and may exclude damage to property in the insured’s care, custody or control. The indemnity stands. The cover does not.

Four clauses that move risk without moving cover

The first is the broad indemnity. An uncapped indemnity for all losses, including defence costs, can outrun policy limits and sit outside the insuring clause altogether. Defence costs are particularly deceptive: some policies treat them as within the limit, others as outside it, and some require prior consent before they are incurred.

The second is the waiver of subrogation. Insurers pay claims and then step into the insured’s shoes to recover from the party responsible. A contractual waiver of subrogation prevents that recovery. Insurers often accept such waivers, but only where the contract is reviewed and the waiver is agreed in advance. An uninformed waiver can breach a policy condition or leave the insurer with a right of recovery against a counterparty that the insured has promised not to pursue.

The third is notification. Contracts frequently require one party to notify the other of a claim or circumstance within a short period. Policies impose their own notification duties, often expressed as conditions precedent. A contractual notice clause that runs on a different timetable, or that requires notice to a counterparty before the insurer, can create a conflict. Late notification to insurers can prejudice cover, particularly where the policy is written on a claims-made basis.

The fourth is the insurance covenant. Clauses requiring a party to maintain insurance, to name the counterparty as an additional insured, or to procure that cover is primary and non-contributory are common. They are not self-executing. Additional insured status must be granted by the insurer, not merely promised by the insured. A failure to obtain it may leave the counterparty without cover and the insured in breach of contract, with no insurance behind the breach.

The Insurance Act 2015 is not a backstop

The Insurance Act 2015 reformed the duty of fair presentation and the remedies for breach. It did not abolish policy exclusions. Insurers remain entitled to rely on clear wording, and a commercial insured is expected to disclose the contractual assumptions on which it is asking the market to write risk. If a contract contains an unusual indemnity, a liquidated damages regime or a regulatory penalty allocation, the broker should know about it before renewal. The Act improves the fairness of the disclosure process; it does not convert an excluded liability into a covered one.

A drafting checklist for in-house teams

Before signature, the contract and the insurance programme should be read together. The following questions are a useful discipline.

1. Map each indemnity to a policy line and a limit. Ask the broker to confirm in writing which clause responds and which exclusion applies.

2. Check the exclusions for contractual liability, fines and penalties, care custody and control, consequential loss and defence costs. Do not assume that a broad liability wording covers an assumed contractual risk.

3. Align notification periods. If the contract requires notice within five days, the policy should not require immediate notice through a different channel. Consider a contractual notice mechanic that permits internal escalation to the insurer.

4. Obtain insurer consent for subrogation waivers and additional insured status before agreeing to them. Where consent is not available, negotiate a fallback rather than promising a status that cannot be delivered.

5. Cap indemnities and link them to insurance proceeds where possible. An uncapped indemnity should be priced as an uninsured risk, not treated as a mere drafting point.

6. Avoid insurance warranties that the business cannot control. An undertaking to procure cover ‘commercially available’ is easier to manage than a warranty that specific cover will be in force for the full term.

7. Review flow-down terms. A head contract indemnity is only as good as the supply chain’s ability to fund it. Check that subcontractors carry matching cover and that their policies include the same waivers.

8. Record the gap. Where a risk is deliberately uninsured, the board should approve it as a risk decision, not discover it after a claim.

When the gap is acceptable

Not every uninsured liability is a mistake. Some risks are better retained, priced and managed than transferred to an insurer. The difficulty arises when the contract language implies a transfer that the policy does not support. A counterparty reading an indemnity will assume the promise is funded. A board reading the same clause may assume the same. Both assumptions can be wrong.

The test is not whether the clause is fair. It is whether the risk is funded. Contracts and policies are separate instruments, but they govern the same balance sheet. In 2026, with bespoke indemnities and tighter underwriting, aligning them before signature is a commercial necessity, not a legal nicety.