Understanding Indemnification Provisions

Indemnification provisions are crucial components of many contracts, serving as powerful tools for risk allocation between the parties. These clauses, which are often heavily negotiated, can significantly impact the financial responsibilities of businesses and persons in various scenarios.

An indemnification clause is an agreement where one party (the indemnitor) agrees to compensate another party (the indemnitee) for losses incurred under particular circumstances that are set out in the contract. This clause is often also referred to as a “hold harmless” provision, and essentially transfers the financial burden of potential risks from one party to another.  Indemnification provisions often include an additional obligation for the indemnitor to defend (at its expense) the other party from claims that are covered by the indemnification clause.

Indemnification clauses may vary greatly in scope, with different scopes being used to shift the allocation of risk between the parties to the provision.  Descriptions of general scopes that are sometimes used include:

1. Broad indemnification clauses, which provide the most extensive protection to the indemnified party.  These clauses may include indemnification obligations in which the indemnitor covers losses of the indemnitee even if such losses are solely caused by the indemnitee’s negligence.  This very broad form of indemnification has been restricted in some states (and may be subject to specific drafting guidelines in others), so it is a good idea to check the law governing this type of provision prior to including it in an agreement.
2. Less broad indemnification clauses, which may include language requiring the indemnitor to be responsible for losses unless the indemnitee is solely at fault.  This, however, could still require indemnification by the indemnitor if the indemnitee is primarily, but not solely, at fault.
3. Even narrower, more restrictive indemnification clauses, which often limit the indemnification obligations to claims arising solely from the indemnifying party’s negligence or willful misconduct.

Indemnification clauses may also be drafted to be one-sided or mutual.  Mutual indemnification clauses are those in which both parties agree to indemnify each other for claims arising out of particular circumstances (although the circumstances may differ somewhat based on the respective obligations of the parties).  One-sided indemnification clauses, on the other hand, are provisions in which only one party agrees to indemnification obligations.  One-sided indemnification clauses are more common in contracts in which one party has significantly more bargaining power than the other party.

When drafting or reviewing indemnification clauses, some issues to consider include:

1. The scope of the indemnification obligations (as discussed above);
2. The categories of costs that the indemnification obligations cover;
3. How long the indemnification obligations last;
4. Whether there are any limitations (for example, a maximum amount the indemnitor would be required to cover) or exclusions to the obligations;
5. Procrocedures for triggering the indemnifying party’s obligations; and
6. Whether a party is required to procure insurance to cover the indemnification obligations.

Indemnification provisions can play a crucial role in a variety of contexts. These provisions can serve as risk allocation tools, protecting parties from potential lawsuits and damages. When negotiating these clauses, consider your business objectives, risk-bearing capacity, and the nature of the transaction.  Specific types of transactions often lend themselves to specific indemnification obligations (for example, indemnification for claims arising prior to closing in a real estate transaction or claims of intellectual property infringement arising out of a licensing agreement).

If you have any questions relating to indemnification provisions in contracts and how they might impact yourself or your business, please contact McNeelyLaw LLP by calling (317) 825-5110.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.