Council Indemnity Clauses: Can You Price the Risk?

How do you price the financial risk in a council care indemnity?

You price it as the largest claim the clause realistically lets through, minus whatever your insurance meets, tested against the cash you could actually find. That is a different sum from the one most owners run. The bid team looks at the margin on the contract, decides the work pays, and signs. An indemnity does not live in the margin. It is a separate promise that only bites when something goes wrong, and when it bites it can take a figure the contract never earned.

So the honest answer to "how do we price it" is: stop pricing the contract and start pricing the worst day. Model the biggest claim the council could reasonably pass to you under the clause, work out how much of that your cover pays, and see what is left standing against your free cash. If the number that lands on the business would not fit, the indemnity is the real commercial term in the contract, whatever the headline fee says.

LOYALS runs the finance function for care agencies across London, and we build this exposure figure before the clause is signed, not after a claim arrives. The sections below are the method we use, with an illustrative London agency carrying a 600,000 pound council contract so the numbers are concrete.

What does an indemnity clause actually make your agency promise?

An indemnity is a promise to put the council back in the position it would have been in if your service had not failed, by paying for the loss directly. It is not the same as ordinary contract damages. With damages, the council would have to prove its loss and the law would limit what it can recover. With an indemnity, you have agreed up front to cover a defined loss, which can skip past those limits and reach further than you expect.

That matters most for the kind of events a domiciliary or supported living agency genuinely faces: a safeguarding failure that forces the council to re-provision care at short notice, a data breach involving service users, an injury traced back to how care was delivered, or a sub-contractor letting the chain down. Each of those can carry a bill well above a month's fees, and an indemnity is the mechanism that routes that bill to you.

The council is not acting unusually by asking for one. Under the Procurement Act 2023, which came into force on 24 February 2025, adult social care sits in the light touch regime, where authorities keep broad freedom over contract terms. What the Act does control is the conditions you must meet to take part in the first place: under section 22 a contracting authority may only set conditions of participation that are a proportionate means of checking you have the legal and financial capacity to perform, judged against the contract's size, difficulty and price. An indemnity is a term of the contract rather than a condition of entry, so that proportionality test does not strike it out, but it gives you the language to argue a cap. If you want the wider picture first, our guide for care agency accountants sets out how these council terms fit the rest of your finances, and our management accounts service is where the exposure figure gets built.

Read that chart as the whole problem in one picture. The claim is 260,000 pounds. Your insurer is expected to meet 150,000 pounds of it. The 110,000 pounds left is what the indemnity actually puts on your business, and it is a serious bite out of 180,000 pounds of free cash. If the insurer disputes cover, which happens more often than owners expect, the figure standing against that free cash is the full 260,000 pounds, and the agency cannot meet it.

Which parts of the clause decide how much you could actually lose?

Three things in the wording decide your real exposure, and they matter far more than the fee. The first is the trigger: what has to happen before you owe anything, and how widely it is drawn. "Any loss arising from the services" is enormous. "Loss caused by our proven breach" is narrower and fairer. The second is the cap: whether your liability is limited at all, and if so whether the cap is per claim or aggregate across the whole contract. The third is the carve-outs: the losses the council insists sit outside any cap, which is where the uncapped money usually hides.

Set those three against each trigger and you get a costing you can actually use. This is the template we work through line by line with an agency before it signs.

How do you put a number on it before you sign?

Pricing an indemnity is two calculations, not one. The first is the expected cost: how likely a claim is, multiplied by how big it would be. For a well run agency a serious safeguarding claim is unlikely in any given year, so the expected cost looks small, and that is exactly the trap. The expected cost tells you what to budget on average. It does not tell you whether a single bad event would sink the business, and that second question is the one that matters for a clause you might only ever meet once.

So the second calculation is the worst realistic call tested against free cash, which is what the first chart showed. The number that decides whether you can carry the risk is the uninsured slice of the biggest plausible claim, held up against the cash you could free without stopping payroll. If that slice is comfortably inside your free cash, the indemnity is survivable. If it is a large fraction of it, or larger, the clause is not a detail, it is the contract.

The cap is the lever that moves this most, because it sets the ceiling on everything above.

An uncapped indemnity leaves the whole loss standing, and a serious council claim can run past the contract's annual value once re-provisioning and the council's own costs are added. A cap at one year's fees pulls the ceiling down to something you can at least see, in this illustration 600,000 pounds. A cap at a quarter of annual fees, which is a reasonable ask on a lower risk contract, brings it to 150,000 pounds, a figure a healthy agency can actually carry. Nothing about the service changed between those three bars. Only the wording did.

What should you ask the council to change?

Four changes do most of the work, and asking for them is normal commercial negotiation, not a sign you cannot perform. Push for an aggregate cap tied to annual fees, so your total liability across the contract is a known multiple rather than open ended. Ask to exclude indirect and consequential loss, which is where speculative figures creep in. Make sure the carve-outs the council keeps outside the cap are matched by insurance that actually responds, because a carve-out your policy does not cover is uncapped money with nothing behind it. And where you can, make the indemnity mutual, so the council carries its own share where its data or decisions cause the loss.

The Procurement Act framework helps you here. The government's guidance on assessing suppliers' economic and financial standing treats guarantees and bonds as remedies that crystallise only when a supplier fails, and tells authorities to use them proportionately so they do not shut smaller firms out. An indemnity sits in the same family of financial protections, and the same proportionality logic applies in the light touch regime for care, which lets authorities modify terms in most circumstances. A well argued cap, backed by the figures, is a reasonable request within that framework.

Here is the position we would take with an agency. If the indemnity is capped at a figure you can model and your insurance responds to it, it is usually an acceptable risk and the contract is worth having. If it is uncapped, or the carve-outs reach past your cover, treat it as a balance sheet decision and do not sign it on operational authority alone. That line, capped and insured versus uncapped or uninsured, is the one that should decide it.

Who in the business should sign this off?

The directors, and the clause should reach the board before anyone commits to the bid. An indemnity that could take a six figure sum is not an operational detail for whoever runs the tender, it is a decision about the company's balance sheet. Section 172 of the Companies Act 2006 requires directors to act in the way most likely to promote the success of the company, having regard to the likely consequences of a decision in the long term and to the company's reputation. Signing an uncapped, poorly insured indemnity without modelling it is hard to square with that duty.

In practice that means a short, deliberate process: get the exposure modelled on real numbers, get a solicitor to mark up the wording, and put the capped figure in front of the directors as a decision, with the worst case and the insurance position stated plainly. The accountant's job in that chain is the number, not the legal drafting, and a clear number is what lets the legal advice and the board decision happen quickly rather than drag the bid.

LOYALS is a King's Cross firm of accountants and business consultants, and we model contract exposure like this for care agencies across London so the figures are ready before your solicitor marks up the clause. If a council term has landed on your desk, the next step is to get the real number in front of you.

If you run a domiciliary, supported living or complex care agency and these council terms keep arriving faster than you can cost them, that is usually the point to hand the finance function over. Our care agency accountants page shows how we carry payroll, invoicing, lender and commissioner reporting and this kind of contract modelling as one monthly service, so you are negotiating from current figures rather than catching up after the fact.