Indemnification Clause Explained: What Is Indemnification
Contents
Understanding Indemnification
What is indemnification: Indemnification is an agreement to pay for someone else's loss or damage.
Indemnification clauses often look something like this:
“Client agrees to defend, indemnify, and hold harmless Company, its Affiliates, and each of their respective directors, officers, employees, and agents from and against any and all third-party claims, demands, and liabilities, including reasonable attorneys’ fees, resulting from or arising out of: (i) any breach of Client’s representations and warranties in this Agreement; or (ii) Client’s failure to comply with Client’s obligations under any and all laws, rules or regulations applicable to Client under this Agreement, except to the extent such violation arises out of Company’s failure to comply with Company’s obligations hereunder; or (iii) Client’s negligent or intentionally wrongful acts or omissions.”
Here's how it works:
- One party agrees in a contract to protect the other party from certain risks.
- If something goes wrong, the protecting party pays for any costs or damages.
- This can include legal fees, court costs, and settlement payments.
A Simple Example
Imagine you own a small bakery in Rockford, Illinois. You hire a delivery driver to take your cakes to customers.
One day, the driver gets into a car accident while making a delivery. The other driver sues your bakery for his injuries.
Your contract with the delivery driver has an indemnification clause. It says the delivery driver has to defend and indemnify you for his negligence.
In that case, the delivery driver must pay for your lawyer to defend you in the lawsuit. He also has to pay for any settlement or money awarded to the injured person.
What This Means for You
Well crafted indemnification clauses can protect your business from unexpected costs.
But it can also create big risks if you're not careful.
Here are some advantages of indemnification:
- Protection: It can shield you from costs that are not your fault.
- Clear Responsibility: It makes it clear who pays if there's a problem.
- Peace of Mind: You know you're covered for certain risks.
But indemnity is a two way street.
If you agree to indemnify someone else, you can be on the hook for payment.
Indemnification clauses are common in most contracts.
Most often each side will agree to indemnify the other for their own negligent or wrongful actions.
In other words, each side will pay for the damage it causes.
Best Practices
- Read Carefully: Make sure you understand what risks you're taking on.
- Negotiate: Don’t take on more risk than you want to.
- Get Help: A small business lawyer can help you understand the contract and negotiate.
Indemnification can be tricky. It's important to understand the indemnification clause before you sign any contract.
If you're not sure, it's a good idea to talk to a small business lawyer.
An attorney can protect your business and help you avoid costly mistakes.
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Disclaimer: The information contained in this article has been prepared by Small Business Legal Solutions LLC for general informational purposes only. Nothing in this article is intended to constitute legal advice on any subject matter. The materials in this article are not intended to and do not create an attorney-client relationship. Do not act or refrain to act based on any information contained in this article without first personally consulting with an attorney. Every circumstance is different and must be judged on its own merits.