What to Consider When Negotiating Indemnification Provisions

Faegre Drinker Biddle & Reath LLP
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Faegre Drinker Biddle & Reath LLP

Indemnification provisions are common in many contracts. At first glance, these provisions can all appear to be roughly the same. But hidden in a “standard” indemnification term can be language that shifts unreasonable amounts or types of risk and costs to you. At their core, indemnification provisions transfer liabilities related to a claim from one party to another party, generally in the event of a breach of contract or a party’s negligence or misconduct in the performance of the agreement. Indemnification provisions often are one of the mostly heavily negotiated terms in a contract, and they can lead to intense litigation over their scope and impact on the parties.

Here are five key things to look for prior to accepting a contractual indemnification obligation:

  1. The indemnity obligation is not proportional to your fault. In this type of indemnity provision, your obligations are not limited to claims or damages resulting from your fault or negligence. Instead, you may be liable for the claim even if the other party is partially or wholly responsible. By agreeing to cover costs caused by the other party, you are accepting risks that may be beyond your control.
  2. The indemnity obligation goes beyond third-party claims. Sometimes the term “third party” is not mentioned in the indemnity provision, but instead a broad promise of protection against “all losses” or “all liability” is imposed. Instead of relying on the contract provisions and common law principles related to first party damages for a breach of contract, you may be liable for both third party and first party damages related to the agreement under this type of indemnity provision.
  3. The indemnity obligation is uninsurable. Bodily injury and property damage claims suffered by third parties are typically within the scope of coverage of standard commercial general liability insurance policies. If your indemnity obligations cover risks beyond these, you might not be covered by such insurance and you may have to defend against the claim and cover such expenses out of pocket.
  4. The indemnity obligation is not reciprocal. Many contacts have “one-way” indemnity obligations. But there may be areas where you want to be the beneficiary of an indemnity obligation. For example, you may want protections from the other party’s site safety violations or from pre-existing problems at the other party’s facility. Seeking reciprocal obligations also can be a strategy to point out an unreasonable scope of the other party’s “standard” indemnity term.
  5. The indemnity obligation includes a defense obligation. Especially if the scope of the indemnity is beyond your insurance coverage, you should be wary of the inclusion of the term “defend” in an indemnification provision. Such an obligation can require you to incur costs related to a claim before your fault in causing such claim has been established.

When signing a contract with an indemnification provision, it is important to carefully read its content. The other party often will attempt to minimize its liability and shift as many risks as it can to you. Identifying and understanding unreasonable indemnification terms will help you to avoid costly liability claims. And having an attorney review these complex provisions in your contract can help you understand what you are giving up and what you are taking on.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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