What is Indemnification?
Our world is full of contracts: construction contracts, consulting contracts, retail contracts, employment contracts, settlement agreements, and, well, writing the list down on a stack of papers might result in a stack so thick that it would cover the distance from our Earth to the Moon. Despite covering an unimaginably wide variety of subject matter, however, many contracts will contain similar provisions, such as choice of law provisions, dispute resolution provisions, severability provisions, integration clauses, and attorney’s fees clauses.
One particularly important provision that parties will often negotiate into their contracts involves indemnification. Indemnification fundamentally serves to protect a party from potential losses or damage. More specifically, one party (the indemnifying party) will hold the other party (the indemnified party) harmless against potential losses or damage caused by third party claims. While one might think that indemnification clauses pertain more to professional or business contracts, they actually can be found in places that regularly affect the average person, even if the average person may not even be aware of it! For example, title policies often contain indemnification provisions to cover situations where another party brings a claim against a homeowner based upon a title issue.
Parties not only must decide whether indemnification makes sense within the context of their agreement, they may also want to negotiate the scope of indemnification. For example, some indemnification provisions will only cover payment for losses, such as payment of a judgment for damages, but will not include any duty to defend. Other indemnification provisions will obligate the indemnifying party to pay for the indemnified party’s defense against the third party claim, in addition to covering any possible judgment rendered. Still other provisions will require the indemnifying party to actually step in and handle the defense directly.
Parties considering the scope of indemnification should not only consider what happens upon invocation of the provision, they also ought to consider under what circumstances indemnification will apply. Indemnification provisions can cover a wide variety of circumstances. Construction contracts provide a good example of differing scopes of indemnification, which in this context typically take one of three forms:
- Broad Form Indemnity – Where the indemnifying party will defend and/or pay for losses even where the indemnified party bears complete fault.
- Intermediate Form Indemnity: Where the indemnifying party will defend and/or pay for losses only to the extent the indemnified party bears no fault.
- Limited Form Indemnity: Where the indemnifying party will defend and/or pay for losses only to the extent of their own fault and/or negligence.
The latter is most common. When negotiating a contract, parties will have to consider the scope and desirability of an indemnification provision in the broader context of their various risks and incentives. Additionally, an indemnification provision is often only as good as the indemnifying party. If a party negotiates an indemnification provision in their favor at the expense of other possible benefits, the party should have confidence that the indemnifying party will have the resources to provide that indemnification when the time comes.
Although outside of the scope of this article, contracts may also contain an implied indemnification, and indeed, even outside of contract law, equitable indemnification has a place in certain circumstances where a party finds itself dragged into litigation through no fault of its own. In any case, indemnification can be a powerful form of protection when faced with third party claims.
The attorneys at Beresford Booth PLLC have significant experience in contract formation, interpretation, and enforcement across a wide variety of subjects, and have negotiated and litigated matters pertaining to indemnity clauses. If you need assistance with any contractual issues, please do not hesitate to contact us at firstname.lastname@example.org or by phone (425) 776-4100 for assistance.