An Overview of Guarantees and Indemnities

It is important that anyone who is asked to provide a guarantee or indemnity understands precisely what their liabilities are under the arrangements.

In this article, we identify the distinguishing features of both guarantees and indemnities and consider the significant differences between the 2 kinds of arrangements.

Features of a guarantee

A guarantee is a contract by which the promisor (called the surety or guarantor) undertakes to be responsible to the promisee (creditor) for a debt default or miscarriage of a third party (debtor).

A guarantee contract includes three parties, namely the –

• creditor who is granting the loan;
• debtor who is utilising the amount of loan; and
• guarantor who is giving the guarantee.

The debtor’s obligation is owed to the creditor under a principal contract. The guarantor or surety is liable to the creditor under a contract of guarantee.

The most common example of a contract of guarantee is where one person (guarantor) undertakes to be responsible to a bank (creditor) for the debts of a friend, relative, business colleague or company (debtor) who is borrowing money from the bank.

The liability of a guarantor is a secondary obligation which is only enforceable (contingent) on the debtor failing to perform the obligations which have been guaranteed. If the primary obligation of the debtor is discharged or becomes void, the guarantee falls away.

Features of an indemnity

An indemnity is a contract by one party to keep the other harmless against loss. Indemnities are also described as an obligation imposed by contract on one person to make good the loss suffered by another.

A contract of indemnity is a primary liability and may arise from an express or implied contract, or in equity.

This means that if you provide an indemnity for the performance of the obligations of someone else you may be called upon to perform those obligations yourself.

There are different types of indemnities which include:

• Bare indemnity: “A” indemnifies “B” against a loss or liability incurred in connection with specified circumstances, without setting any specific limitations.
• Proportionate indemnity: “A” indemnifies “B” against losses except those incurred as a result of any act or omission of “B”.
• Third party indemnity: “A” indemnifies “B” against liabilities to or claims of “C”.
• Party/Party indemnity: each party to a contract indemnifies the other for loss occasioned as a result of the indemnifier’s breach of contract.
• Reverse/reflexive indemnity: “A” indemnifies “B” against loss or liability incurred as a result of party “B”’s own acts or omissions.
• Compensatory and “prevent loss” indemnities: A compensatory indemnity is expressed as an obligation to pay or compensate for loss suffered. A prevent loss indemnity is a “hold harmless” indemnity.

Differences between guarantees and indemnities

The key differences between guarantees and indemnities include:

• a guarantee imposes a secondary liability, which means that there will be another person who is primarily liable for the same obligation, whereas an indemnity imposes a primary liability.
• in most States, guarantees must be in writing or evidenced in writing, whereas indemnities do not have to be in writing and may be implied by the Courts.
• a guarantor’s liability is limited by the extent of the debtor’s liability. In contrast, an indemnifier’s liability is determined by the terms of the indemnity.
• a guarantor is discharged from liability if the principal contract is void or unenforceable, whereas an indemnifier generally remains liable if another associated transaction is unenforceable or void.

Function of guarantees and indemnities

A guarantee contract is usually used to provide protection to a person, typically a bank or finance company, against loss suffered through entering into a transaction if the obligations of the other party to that transaction are not performed. It reduces the credit risk faced by a bank by giving the bank an entitlement to demand payment from the guarantor in the event of the debtor’s default.

In contrast, indemnities are designed to allocate risk between various parties to a contract, to eliminate the need to show causation as an element of a claim and to avoid the need to mitigate loss.

Indemnity clauses can be found in many different types of commercial contracts, for example, leases, sale of goods, construction contracts, manufacturing contracts and service agreements.

Conclusion 

Both guarantees and indemnities can impose complex obligations. As such, they should not be agreed to lightly and should only be considered upon legal advice as to the effect of the specific terms created by the arrangements.

If you know someone who may need assistance or advice on how to proceed please contact us on (08) 8155 5322 or email [email protected].

Making a total and permanent disability claim – understanding the process

Facing a total and permanent disability is life-altering, bringing about significant physical, emotional, and financial challenges. In such trying times, having total and permanent disability insurance and understanding your rights and entitlement to claim benefits can provide much-needed financial security for you and your family.

This article provides general information only and you should obtain professional advice relevant to your circumstances. If you are considering making a total and permanent disability claim, we recommend seeking legal advice. A lawyer can help assess your eligibility, assist in gathering the necessary evidence, correctly file your claim, and negotiate with the insurer on your behalf.

What is Total & Permanent Disability?

Total and permanent disability (TPD) generally refers to a condition that prevents someone from returning to work or engaging in any gainful employment for which they are reasonably qualified by education, training, or experience. A TPD can arise from various illnesses and injuries, for example, serious medical conditions such as cancer, heart disease, or mental health disorders; and severe accidents resulting in permanent impairment, such as spinal cord injuries or traumatic brain injuries.

In Australia, TPD insurance is generally obtained through:

• Superannuation: many superannuation funds include a TPD insurance component as part of their default cover.
• Private insurance: individuals can purchase standalone TPD insurance policies from private insurers.

TPD insurance provides a lump sum payment if you can no longer work in your usual occupation or other type of employment, based on your qualifications, experience, and training. It is important to carefully review the policy documents to understand the specific eligibility requirements and any exclusions that may apply. Note also, that TPD cover through your superannuation fund can potentially end if you change funds, stop making contributions to your superannuation, or reach a certain age.

Eligibility for TPD Benefits

The eligibility criteria for TPD benefits can vary depending on the specific insurance policy or superannuation fund. However, some general requirements typically apply:

• Definition of TPD: the policy document will define what constitutes TPD, often including conditions like being unable to work in your occupation or any occupation for which you are reasonably suited.
• Waiting period: most policies have a waiting period (for example, six months) during which you must be continuously disabled before you can make a claim.
• Medical evidence: you will need to provide comprehensive medical evidence from your treating doctors to support your claim.

The TPD Claim Process

Navigating a TPD claim can be complex and time-consuming. The general process is as follows:

1. Notify your insurer or superannuation fund: inform them of your intention to make a TPD claim as soon as possible.
2. Gather supporting documentation: this includes medical reports, employment history, and any other relevant evidence.
3. Complete the claim form: fill out the claim form accurately and comprehensively, providing all the requested information.
4. Assessment of your claim: the insurer or superannuation fund will assess your claim, which may result in requests for further medical examinations or interviews.
5. Decision: you will receive a decision on your claim, which can either be approved, denied, or require further information.

Tips for a Successful TPD Claim

While the TPD claim process can be daunting, following these tips can increase your chances of a successful outcome:

• Seek professional advice: a compensation lawyer specialising in TPD claims can help guide you through the process, ensure you meet the procedural requirements, and advocate on your behalf.
• Be organised: keep all your documents and correspondence related to your claim in one place for easy access – you might consider asking a trusted family member or friend to assist with this.
• Be thorough: provide as much detail and evidence as possible to support your claim.
• Be patient: the assessment process can take time, so be patient and persistent.
• Don’t give up: if your claim is denied, you may have the right to appeal the decision. If you haven’t already, seek professional advice to explore your options.

How a Compensation Lawyer Can Help

A compensation lawyer with expertise in TPD claims can be invaluable throughout the process of making your TPD claim. Your lawyer can:

• Assess eligibility: review your policy and medical evidence to determine your eligibility for TPD benefits.

• Gather evidence: assist in collecting and organising all necessary documentation to support your claim. Lawyers generally have a network of medical and other professionals who can be retained to assist with preparing evidence. 
• Liaise with the insurer: this can be particularly helpful given the insured person will often be facing a traumatic and difficult period. Your lawyer can communicate with the insurer or superannuation fund on your behalf, ensuring your rights are protected and that the correct documents are lodged within any specific timeframes.
• Negotiate a fair settlement: if your claim is approved, your lawyer can assess it to ensure it reflects the full extent of your disability and its impact on your future earning capacity.
• Represent you at the Australian Financial Complaints Authority (AFCA): The AFCA helps resolve disputes between consumers, insurers and superannuation funds about products such as TPD insurance. Your lawyer can help lodge complaints about delays in processing claims, the calculation of entitlements under a policy, and an insurer’s denial to pay a claim.
• Represent you in court, if necessary.

Conclusion

Claiming total and permanent disability benefits can be a complex and emotionally challenging process. Understanding your rights, eligibility criteria, and the steps involved is crucial to securing your financial future. Seeking professional advice from a personal injury lawyer can strengthen your chances of a successful claim.

You don’t have to navigate this journey alone – support and guidance are available to help you through this difficult time. If you know someone who may need assistance or advice on how to proceed please contact us on (08) 8155 5322 or email [email protected].