Many contracts contain clauses requiring parties to carry insurance and to agree to indemnify one party or another in the event of a lawsuit.  Such language is typical in lease agreements, distribution contracts, and construction deals, to name a few.  But, what does this language mean?   Are all clauses the same?  Does insurance cover the indemnity obligation that a party undertakes in such an agreement?

The indemnity language that one sees may all seem alike, but there are significant differences.  Indemnity provisions  are either 1) risk shifting, or 2) risk sharing. 

A risk shifting provision requires one party to assume all risks of claims and lawsuits whether the risk assuming party was at fault or not.  If you've ever actually read the release that you sign when you go tubing or skiing, it is usually a risk shifting agreement.  If you get hurt, no matter who is at fault, you agree to hold the owner harmless from any lawsuit. 

Risk sharing provisions usually require a party to indemnify another only for the party's own negligence or fault, not the other party's negligence.  We see risk sharing arrangements in  situations where the parties have somewhat equal bargaining power.  But, in a risk sharing arrangement, what if both parties are sued and the complaint simply alleges that both were at fault?  Generally, both parties, despite the indemnity provision, are going to have to defend the lawsuit, and the degree to which one party will have to indemnify the other will depend on their proportionate share of liability determined at the trial.

The good news, you may think, is that at least most indemnity provisions are backed up by insurance coverage.  This is true, but, unless you have language in your agreement that requires all indemnity obligations to be covered by insurance, the insurance coverage that you have will probably not cover all of your indemnity obligations.  The reason is that the insurance agreement is separate from the indemnity provision, and insurers agree to provide coverage only as stated in the insuring agreement, not as stated in your indemnity provision.

The bottom line is that insurance and indemnity provisions are complex arrangements that may or may not accomplish your contractual goals.  If you are uncertain of the language in a contract that you are dealing with, don’t assume that the standard form language that you are using is sufficient.