If you’ve ever skimmed past the word “indemnify” because it reads like legalese, you’re not alone — and that’s exactly the problem. Indemnity clauses are where some of the biggest, most one-sided risk in a subcontract quietly sits. Here’s what the word actually means, in plain English, and what to look for before you sign.
The one-sentence answer
To indemnify someone is to promise to cover their losses. In a subcontract, an indemnity is you agreeing to pay for certain costs, claims or damages the other party suffers — a contractual promise to reimburse them if a specified thing goes wrong. The person making the promise is the “indemnifier” (often you); the one being protected is the “indemnified party” (often the builder).
What an indemnity clause actually says
In the wild, they usually read something like:
“The Subcontractor shall indemnify and hold harmless the Contractor against all loss, damage, liability, claims and costs arising out of or in connection with the subcontract works.”
Two phrases do the heavy lifting. “Indemnify and hold harmless” means you pay, and you make sure the other party isn’t left out of pocket. “Arising out of or in connection with” is a very wide net — it can reach a lot further than “caused by.” The exact words decide how far the clause stretches, which is why indemnities deserve more attention than almost anything else in the document.
Why it’s in your contract
Indemnities aren’t a trick — they exist for a legitimate reason. Risk has to sit somewhere, and the party doing the work is often best placed to manage it. The principal engages the builder, the builder engages you, and risk is passed down the chain: the builder indemnifies the principal, and asks you to indemnify them for the part of the work you control. If your crew damages something, or your workmanship causes a loss, it’s fair that you wear it rather than the builder. The problem isn’t that indemnities exist. It’s how widely they’re sometimes drafted.
The two types — and why the difference is everything
- Broad (or “bare”) indemnity. Unqualified. Often worded to capture losses “arising out of or in connection with” the work regardless of who was actually at fault — sometimes even where the other party’s own negligence played a part. This is the version that bites.
- Proportionate (fault-based) indemnity. Limited to losses “to the extent caused by” your acts or omissions. You cover your share, not everyone’s — and it lines up with Australia’s proportionate liability rules. This is the fair version.
Same clause name, wildly different exposure. Five words — “to the extent caused by” — can be the difference between covering your own mistakes and covering everybody’s.
What a broad indemnity can actually cost you
- It often sits outside the liability cap. Many contracts cap your total liability — then quietly exclude indemnity claims from that cap. The result is effectively unlimited exposure on the one clause most likely to be triggered.
- Your insurance may not cover it. Professional indemnity and liability policies in Australia often exclude liability you’ve taken on by contract, unless you’d have been liable anyway. A broad indemnity can leave you exposed to losses your insurer won’t touch.
- You can pay for faults that aren’t fully yours. A broad indemnity can rope you into third-party claims, consequential losses, even the other side’s share of the blame — well beyond the work you actually controlled.
That’s how a single paragraph can turn a profitable job into a loss you can’t insure against.
How to make an indemnity fairer
You usually can’t delete an indemnity — but you can narrow it. What to push for:
- “To the extent caused by” wording — tie your liability to your own fault, not the whole job.
- Carve out the other party’s negligence — you shouldn’t be indemnifying someone for their own mistakes.
- Align it with the liability cap — bring indemnity claims inside the cap, not outside it.
- Check it against your insurance — confirm with your broker that what you’re agreeing to is actually covered.
- Exclude consequential / indirect loss where you can — so you’re not on the hook for open-ended downstream losses.
Expect some pushback — head contractors usually hold the bargaining power. But asking for fault-based wording is standard and reasonable, and more often than not you’ll get at least some of it. The worst outcome is signing a broad indemnity without realising it was broad.
Where this leaves you
“Indemnify” isn’t a word to skim past — it’s often the clause carrying the most risk in the entire document, and the damage stays invisible until something goes wrong. The hard part is telling, at a glance, whether the one in front of you is the fair kind or the costly kind. (For another area where the fine print decides whether you get paid, see our guide to the Security of Payment Act in NSW.)
Not sure which kind you’re signing? That’s exactly what ClauseIQ checks. Upload your subcontract and get a plain-English risk report in minutes — indemnity and every other risky clause flagged, with a ready-to-use list of what to ask for. $49 a contract, not $2,000. Get your free risk assessment →
Frequently asked questions
What does “indemnify and hold harmless” mean?
You promise to cover the other party’s losses for the things the clause specifies, and to make sure they’re not left out of pocket for those claims. “Hold harmless” reinforces that they shouldn’t bear the cost themselves.
Is an indemnity the same as insurance?
No. An indemnity is a promise between you and the other party in the contract. Insurance is separate cover from an insurer. Importantly, your insurance may not cover everything you promise in an indemnity — which is why broad indemnities are risky.
Can I get an indemnity clause removed from a subcontract?
Rarely removed entirely, but often narrowed. The common moves are fault-based (“to the extent caused by”) wording, carving out the other party’s own negligence, and bringing the indemnity inside the liability cap.
What is a “bare” indemnity?
A broad, unqualified indemnity that can make you liable regardless of fault — the opposite of a proportionate, fault-based one. If you see one, it’s worth getting advice before you sign.
This is general information to help you understand your rights — not legal advice. Indemnity wording is powerful and the exposure can be large. Before you sign (or if you’re already in a dispute), have an Australian construction lawyer review the specific clause.
