Indemnity Agreement: Definition, Purpose, Top Terms

Are you worried about being held responsible for another company’s negligence?

If so, an indemnity agreement is a perfect solution for your concerns. Indemnity agreements will prevent your associates and customers from suing you over the actions of your contractors and third parties. This agreement can stipulate and enforce the necessary provisions that protect your rights.

Indemnity agreements are complicated, which means that you should take steps toward familiarizing yourself with their purpose. Keep reading this article to learn everything you need to know about indemnity agreements.

What is an Indemnity Agreement?

An indemnity agreement, also known as a hold harmless agreement, waiver of liability, release of liability, or no-fault agreement, safeguards the indemnified party against loss or damages associated with a third-party business arrangement. There are two parties in an indemnity contract, including the indemnitee and indemnifier. The indemnitee is the party that is seeking protection, whereas the indemnifier is the one promising to hold harmless.

Types of third-party actions that indemnity agreements prevent include:

• Lawsuits
• Claims
• Damages

When someone indemnifies you, it means that they will not sue you for a third-party’s actions. However, these protections do not preclude you from claiming compensation after a breach of contract. Indemnity agreements primarily benefit the indemnified party (the party who will be held harmless) and not the indemnifier.

Purpose of Indemnity Agreements

The purpose of indemnity agreements is to shield a party from liability associated with a contracting party’s negligence or carelessness. Evaluate your situation with a legal or financial professional to determine if an indemnity agreement would serve a useful purpose in your organization during an important transactions.

Benefits of indemnity agreements include:

1. Indemnified parties generally don’t need to prove causation
2. Loss mitigation measures in place for the indemnified party
3. Statute of limitations apply to contract breach claims

Simply put, you should consider using an indemnity agreement when you are contracting with another party that will be engaged in an action that may create risk. You can incorporate them into a master services agreements or sales contracts or ask associates to sign them as a standalone document. Regardless of the method you use, it is critical to become familiar with the key terms in an indemnity agreement.

Key Terms in Indemnity Agreement

Like all common law and commercial contracts, indemnity agreements contain fundamental guidelines and provisions that let contract principals know about their rights and obligations. Omitting critical terms can result in a document that does not adequately protect you or your company. Ensure that you draft a comprehensive agreement to avoid potential future issues.

Key terms in indemnity agreements include:

• Names and addresses of the parties
• Contract agreement date
• Contract recitals and purpose
• Exchange of consideration
• Scope of coverage
• Limitation of liability
• Indemnification clause
• Indemnification exceptions
• Claim notice requirements
• Indemnification authorizations
• Defense assumptions clause
• Defense failures clause
• Settlement and consent clause
• Enforcement
• Duration

Indemnification agreements contain several provisions. This strategy ensures that indemnified parties can remain as specific or flexible as possible when working with other parties. However, other clauses apply to your situation not found in the above-referenced list, which means you should speak with insurance lawyers to determine how to structure your documents.

Types of Indemnity Agreements

The indemnity agreement that you select depends upon the facts and circumstances of your relationship with the other party, industry, and geographic location. It can be challenging to determine which indemnity agreements apply to your situation, so obtain legal advice before drafting and executing one.

Below are five types of indemnity agreements:

1. Unilateral
2. Reciprocal
3. Limited
4. Intermediate
5. Broad

The type of indemnity agreement you select is based upon the level of protection and reciprocity you want or don’t want. Please note, these agreements are also not suitable for every business situation and may create issues with other provisions.

Here is an article that goes over indemnity agreements.

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Examples of Businesses that Use Indemnity Agreements

A wide range of businesses utilizes indemnity agreements within the course of their business. You will want to have one in place if you rely upon the skills and services of another party to deliver on your core product or service.

Examples of business that use indemnity agreements include:

• Example 1. Real estate
• Example 2. Construction
• Example 3. Events management
• Example 4. Rental car companies
• Example 5. Pet kennels
• Example 6. Rental properties
• Example 7. Surety bond companies

Business litigation lawyers can help you decide if your business will stand to benefit from indemnity agreements. If someone asks you to sign an indemnity agreement, only do so if you know what is expected of you. Otherwise, have your attorney peruse the contract before signing it.

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Sample Contract Language To Review

1. Indemnification. 454 hereby agrees to indemnify and hold harmless CuraGen, and its successors and assigns, from and against any and all claims, liabilities, actions, causes of action, losses, costs or expenses (including, without limitation, any reasonable legal, accounting and other expenses of experts or third party professionals for defending any actions or threatened actions) incurred by CuraGen, or any of such successors or assigns, as a result of 454 defaulting in or failing to perform any of the tenant’s obligations under the Lease arising on or after the Effective Date. Curagen hereby agrees to indemnify and hold harmless 454, and its successors and assigns, from and against any and all claims, liabilities, actions, causes of action, losses, costs or expenses (including, without limitation, any reasonable legal, accounting and other expenses of experts or third party professionals for defending any actions or threatened actions) incurred by 454, or any of such successors or assigns, as a result of CuraGen defaulting in or failing to perform any of the tenant’s obligations under the Lease arising prior to the Effective Date.
2. Indemnification Procedure. Whenever any demand shall be made upon a party (the “Indemnified Party”) under the Lease or Assignment for which the other party (the “Indemnifying Party”) is required to indemnify the Indemnified Party, the Indemnified Party shall promptly notify the Indemnifying Party of such demand in writing and provide a copy of any written document delivered to the Indemnified Party relating to such demand. No notice need be given by the Indemnified Party unless and until it has received written notice of the demand. Within fifteen (15) days of written notice to the Indemnifying Party of any such demand, the Indemnified Party shall either satisfy and pay in full such demand or assume the defense of such demand at its sole cost and expense with counsel approved by the Indemnified Party in its reasonable discretion. If the Indemnifying Party shall fail to satisfy any such demand or fail to assume in a reasonable manner the defense of any demand arising under the Lease or Assignment, as applicable, within the time period set forth above, the Indemnified Party shall be free to defend, settle, litigate, appeal and otherwise act in its reasonable discretion, and the Indemnifying Party shall be obligated to reimburse in full any settlement, judgment or similar liability and all costs associated therewith including reasonable out-of-pocket legal fees and disbursements and shall not have any defense based on the reasonableness or necessity of the Indemnified Party’s actions or its failure to defend effectively such demand.
3. Other Rights to Indemnification. The rights to indemnification and advances provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnified Party may now or in the future be entitled under any other agreement or any provision of applicable law.

Reference :

Security Exchange Commission - Edgar Database, EX-10.5 6 dex105.htm INDEMNITY AGREEMENT, Viewed May 14, 2021, < Link To Page >.

Here is another sample of an indemnification agreement.

When Should I Sign an Indemnity Agreement?

You should sign an indemnity agreement when there is a high degree of likelihood that you could incur third-party risk in a transaction.

For example, when you run a construction company, you likely hire contractors that represent they complete work to specific standards – standards that you are happy with. If they don’t meet these standards at no fault of yours, indemnity agreements can prevent the customer from filing an insurance claim or civil lawsuit against your business.

Help with Indemnity Agreements

Business owners are generally aware of the terms and conditions associated with signing a contract. However, it is also possible to engage with a company using indemnity agreements for nefarious purposes. Getting help with indemnity agreements is essential whether you are signing or offering one so that you aren’t deceived into a transaction that does not serve its intended purpose.

Here are three things you should know about indemnity agreements:

1. They Can Be Hidden in Contracts

Indemnity agreements that are not drafted as standalone documents are often buried in much larger contracts. If an indemnification clause seems hidden within a more significant contract, that means it probably is. Doing so can shift a considerable amount of burden from one party to another.

2. You Must Know the Key Terms

The legal language associated with indemnity agreements is complicated. They may rename the indemnity agreement entirely to disguise intent. Look out for phrases containing words like “hold harmless” and “obligation to defend.”

These terms are dead giveaways that the document in question is an indemnity agreement.

3. Be Aware of Scope and Depth

You must take the time to review or draft your indemnity agreement thoroughly. Glossing over a single provision can result in another entity taking advantage of a vulnerable position. You should hire insurance or litigation lawyers to analyze your obligations and rights to determine if an indemnity agreement is proper for you.

Regardless of your role in the indemnity agreement process, you must recognize that they wield significant power. Every party takes painstaking efforts to mitigate their legal risk, and you should do the same. Do not be afraid to review them with legal professionals with a background in small business law before signing or offering.

Indemnity agreement provisions must be worded carefully to avoid legal errors that can result in an unenforceable document. Hire business lawyers to ensure that you receive the legal protections you want and deserve.