An indemnity covers only its trigger
An indemnity responds to a defined trigger event. If the event that actually happens is not within the trigger, the indemnity does not pay - however real the underlying loss. Triggers are construed on their words, read against the contract as a whole, so imprecise trigger language is where indemnities most often fail.
That makes the trigger, not the headline promise to indemnify, the place to focus.
Wood v Capita: self-reporting was not a claim or complaint
Wood v Capita Insurance Services Ltd [2017] UKSC 24 is the leading example. The seller indemnified the buyer against losses following and arising out of claims or complaints registered with the FSA pertaining to mis-selling. The company's own compliance review found mis-selling; it voluntarily self-reported to the regulator and agreed a customer redress scheme costing around GBP 2.4 million.
The Supreme Court held the indemnity was not triggered. Self-reporting did not amount to claims or complaints registered with the FSA - the trigger required external claims or complaints, not the company's own voluntary disclosure. The buyer recovered nothing under the indemnity for the redress.
Why the court read it narrowly
Lord Hodge noted that where a contract contains both time-limited warranties and an indemnity unlimited in time, the commercial context suggests the parties intended the broader protection to have specific, narrow triggers. And it is not the court's function to improve the parties' bargain. The narrow trigger was given effect, even though a broader one would have helped the buyer.
So breadth elsewhere - an indemnity unlimited in time - can actually point towards a narrow trigger, the opposite of what an indemnified party might hope.
Drafting precise triggers
If you want the indemnity to cover a particular route to loss, name it. Use numbered sub-clauses where several conditions apply, and avoid compound sentences where a qualifying phrase might attach to some but not all of the preceding items. For example, cover losses arising from (a) third-party claims or complaints; (b) regulatory investigations or enforcement; and (c) voluntary remediation undertaken after discovery of non-compliance.
The Wood v Capita gap - voluntary self-reporting - is exactly the kind of event that must be named expressly if you want it covered. Do not assume a broad-sounding trigger reaches it.
What to check in review
Map the events you actually fear and test each against the trigger. Would self-reporting, a proactive remediation, a regulatory investigation that has not yet become a claim, or a third-party demand each fall within the words? If the trigger turns on external claims or complaints, internal discovery and voluntary action are probably outside it.
Triggers are construed by the same principles as the rest of the contract (see the contract-interpretation guide); for indemnities the cost of a narrow trigger is simply more visible, because it can mean no recovery at all.
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Practical checklist
- Treat the trigger as the limit of cover - an indemnity pays only for the events it names (Wood v Capita [2017] UKSC 24).
- If you want voluntary self-reporting or proactive remediation covered, name it expressly.
- Use numbered sub-clauses for multiple trigger conditions; avoid ambiguous compound sentences.
- Do not assume a broad-sounding or unlimited-time indemnity has a broad trigger - it may be read narrowly.
- Map every feared route to loss and test it against the trigger wording.
- Remember courts construe triggers on the words and will not improve the bargain.
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
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