Contractors entering into contracts for residential building work are required by the Home Building Act 1989 to obtain home warranty insurance. Often the builder or a third party (such as a director) is required by the insurer to give an indemnity for claims made upon the policy. This practice was recently challenged before the NSW Supreme Court on the basis that it is unconscionable.
“Mr V” was a director of a building company that constructed 7 units in a southern suburb of Sydney. The builder purchased an insurance policy from Allianz for residential building work, as required under section 99 of the Act. Allianz required Mr V and his wife to provide personal indemnities.
After the development was complete, claims were made by the owners corporation and an individual owner while the building company was in voluntary administration. Allianz settled the claims and issued demands for payment upon Mr V and his wife for $1.35 million.
Mr V did not make any payment and claimed that Allianz, by requiring him and his wife to sign deeds of indemnity, took advantage of the legislative requirement to obtain insurance in a manner that was unconscionable.
Though the bargaining power of the parties was unequal, the Court found that Allianz did not engage in unconscionable conduct as it had not acted in a way that was clearly unfair and unreasonable. The Court ruled that the indemnities were enforceable as they were reasonable and necessary to protect the legitimate interests of Allianz.
This decision has been reinforced in another, separate case on the same issue.
Directors should assume that personal indemnities may be enforced and should consider the potential personal impact accordingly. It is important that anyone giving a personal indemnity understands its nature and effect.
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