What is Indemnification?
Indemnification is a contractual obligation of Party A to compensate the other party (“Party B”) for damage, loss, or other financial issues due to specific acts (or failure to act).
Simply put, Indemnification is a promise to pay if something happens.
Simplified Example: In a very simplified way, car insurance works as a form of indemnity: You enter into a contract with the insurance agency to cover your costs or expenses if you are in a car accident— that is something covered by your policy (the contract). However, your car insurance wouldn’t cover a flood in your home, as that isn’t part of your policy.
What Does An Indemnification Clause Look Like?
Typically, it’s easy to spot an indemnification clause because it will say ‘INDEMNIFICATION.” It’s usually pretty clear! You can also look for the following language” :
- hold harmless
“Indemnify” and “hold harmless” both mean pretty much the same thing: to make the injured party (the person who is invoking that contract clause) “whole” again. That means that the other party is agreeing to cover costs and expenses to make it as if the “hurt” party was never sued/ damaged.
When an indemnification clause uses the word “defend,” you should look at it especially carefully. “Defend,” suggests that you are responsible for defending against another party’s lawsuits. This type of language is particularly important for folks in the creative industry if your work is attacked/ someone sues over your work. If you agree to indemnify a multi-national corporation, and someone sues them for IP Infringement, you may not be able to recover. This is why it’s important to comb through indemnification clauses, consider what you are agreeing to, and evaluate them in light of insurance coverage.
How does Indemnity Affect My Business?
In the business world, business owners use indemnification as a way to avoid being held responsible to pay for for injuries, accidents, or legal claims that are not the business’s “fault.” It is a way to shift risk.
Some of these situations include:
- Compensation to a third party due to loss, damage, and/or injury
- Legal costs associated with that loss, damage, or injury
- Protection against certain acts of negligence
- Loss of expected profit, such as a subcontractor not finishing work on schedule so you can’t finish work for a Client
- Breach of contract
How do I deal with Indemnification Clauses?
Indemnification Clauses are some of the most confusing clauses you will encounter in a service contract– and some of the most important. We suggest you contact a lawyer to explain your service agreement indemnification clauses. This will make sure they are (i) appropriate in scope, (ii) helpful, and (iii) mutually cover YOU in the event of damage.
If you find yourself working with a lot of contracts containing indemnification clauses, our Access Membership is a great way to get eyes on your agreements with a flat, monthly rate!