Avoid [paying for] litigation: Indemnification Agreements
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I title my posts "avoid litigation" because many clients spend time working to avoid litigation. The best way to do this is to act conscientiously, be fair and prudently choose with whom you associate.
Businesses use Indemnity Agreements to avoid paying for litigation. Indemnification Agreements allow parties to contract so that one party (indemnitor) will pay the other for any loss suffered by the other party (indemnitee) under the contract. Those losses are commonly claims from third parties which can include litigation costs, settlements or awards. Indemnity Agreements are a double edge sword. While an Indemnity Agreement may protect your business, an Indemnity Agreement may also put your business in the position where it is responsible for costs and damages outside your control. You can find Indemnification Agreements in subcontractor agreements, rental contracts, leases, go cart use agreements, sales slips and Goldman Sachs’ agreement with its Board of Directors.
Writing an Indemnity Agreement into Articles of Incorporation may make sense. Often boards work at no pay. If board members faced individual liability and attorney fees, you may find fewer individuals willing to serve.
For example: a broad agreement may provide that an equipment user (indemnitor) is responsible for all liability related to the use of the equipment even if the equipment distributor (indemnitee) is negligent. The user (indemnitor) may then be liable for injuries caused because a distributor removed a safety feature.
A “good” Indemnification Agreement is like any good contract. It says what it means. If you want an Indemnification Agreement in a contract, specify:
- Who is covered (just claims from outside parties or claims from the employees of the other parties?)
- What is covered (only actual amounts paid, only items that go to litigation, provable business losses, only personal injuries, any loss at all?)
- Will the other party be indemnified if the loss is a result of that party’s own negligence?
There are no cases about sensible Indemnification Agreements because, in those situations, everyone understood their rights and obligations. Bad Indemnification Agreements lead to litigation.
Bad agreements are kitchen sink agreements with no clear intention of the parties. Resist the urge to cut and paste the following:
You agree to be entirely responsible for and to protect, indemnify and hold harmless me from any and all losses, actions, debt, demands, claims, lawsuits, legal fees, costs, and expenses for any injury, death, property damage, or any other liabilities incurred by me.
Moreover, resist the urge to “cut and paste” anything important. Remember: there is no such thing as a “standard” Indemnification Agreement . Read what you sign and be sure that you are comfortable with an agreement. If you are signing a contract for your business, make sure the business is specifically listed as the indemnitor or you may be putting your bank account in the hands of someone who has nothing to lose.
Also, know what your insurance covers and doesn’t cover. Verify that your liability insurance covers liability as a result of a contractual agreement.
Additionally, if you are the indemnitee, understand the indemnitor's coverage. (You may want a certificate of insurance or you may want to be a named insured).
Finally, decide if you really want an Indemnity Agreement. It may be the right time to include an Indemnity Agreement when:
- it is the fair thing to do.
- the other party is “the big dog” who has the resources.
- your business only deals with professionals who do their own risk assessment and are prepared to take on the risk.
- you want to afford protection to a consultant, board member, agent or business party and are in a position to offer that protection.
- there is a financial incentive because sorting out percentage of fault would be impossible.
Caution should be exercised when:
- the big dog wants you to take on the liability.
- you could not cover the loss (through insurance or otherwise).
- the other party doesn’t have assets or insurance with which to pay.
- a landlord requests that a tenant take responsibility for damage even if from the negligence of the landlord.
- the intent to indemnify is not clearly expressed.
- you just don’t understand the agreement.
Just like waivers of liability, Indemnity Agreements have a purpose. If you don’t know that purpose, don’t sign it.