By Joanne Hue, Last updated: 2022-05-03 (originally published on 2022-03-24)
Introduction: Indemnity Agreement
Indemnity agreement is also known as hold harmless agreement, waiver of liability, release of liability, or no-fault agreement. It safeguards the indemnified party against loss or damages associated with a third-party business arrangement. In an indemnity agreement, there are two parties: the indemnitee and indemnifier. The indemnitee is the party who is seeking protection, whereas the indemnifier is the one promising to hold harmless. Learn what indemnity agreement is and its types.
Which types of third-party actions are prevented by the indemnity agreements?
When a party is indemnified by someone, it means that they will not sue the party for a third party’s actions. However, these protections don’t prevent the party from claiming compensation after a breach of contract. Indemnity agreements primarily benefit the indemnified party, not the indemnifier.
Purpose of Indemnity Agreements
The purpose of indemnity agreements is to protect a party from the liability associated with the negligence or carelessness of a contracting party.
Benefits of indemnity agreements:
- The causation is generally not proved by the indemnified parties.
- Loss mitigation measures in place for the indemnified party.
- Statute of limitations apply to claims arising from the breach of contract.
A party should consider entering into an indemnity agreement when dealing with another party that will be engaged in an action that may create risk. Such agreements may be incorporated into master services agreements or sales contracts or these can exist as a standalone document as well. Irrespective of the use of the method, it is important to familiarize yourself with the key terms in an indemnity agreement.
Key Terms in an Indemnity Agreement
Like all common law and commercial contracts, the fundamental guidelines and provisions contained in the indemnity agreements are to let the contractual parties know about their rights and obligations. Where such terms are not included, the agreement doesn’t adequately protect the parties. Therefore, it is important that a comprehensive agreement is drafted to avoid potential future issues. The key terms in indemnity agreements include:
- Names and addresses of the parties
- Date of agreement
- Recitals and purpose of contract
- 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
There are several provisions contained in the indemnification agreements. This is to ascertain that the indemnified parties can remain as specific or flexible as possible when working with other parties. However, a party needs to consult insurance lawyers on how to structure the documents where other provisions also apply to a particular case and which are not mentioned in the above-given list.
Types of Indemnity Agreements
The applicability of indemnity agreements varies depending upon the facts and circumstances, the relationship between the parties, industry, and geographic location. It is better to obtain legal advice before drafting and executing an indemnity agreement because it can be difficult to determine which indemnity agreements apply to a particular case. There are five types of indemnity agreements.
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.
Examples of businesses that Use Indemnity Agreements
These agreements are used by a wide range of businesses. A party will like to enter into an indemnity agreement where it relies upon the skills and services of another party to deliver the core product or service.
Businesses that use these agreements include Real estate, Construction, Events management, Rental car companies, Pet kennels, Rental properties, and Surety bond companies. A party can take the help of business litigation lawyers where its business will stand to benefit from the indemnity agreements. The party should only sign the indemnity agreement where it is aware of the expectations of entering into such an agreement. Otherwise, it is always advisable to consult a legal advisor before signing it.
When should a party enter into an Indemnity Agreement?
The indemnity agreement should be entered into by the party where there is a high degree of likelihood of incurring third-party risk in a transaction. For example, where a party is in the construction business, it is likely to hire contractors to get the work completed to specific standards. If those standards are not met by such contractors, and there is no fault of the party then indemnity agreements can prevent the customer from filing an insurance claim or civil lawsuit against a party’s business.
Help with Indemnity Agreements
Generally, business owners are aware of the terms and conditions associated with signing a contract. However, there might be situations where these agreements in particular are used by the company for nefarious purposes. It is better to take advice before signing an indemnity agreement so that a party isn’t deceived into a transaction that does not serve its intended purpose. The three things a party should consider when they enter into contracts are as follows:
- They Can Be Hidden in Contracts: The indemnity agreements are not drafted as standalone documents. These are buried under much larger contracts. So, careful review can shift a considerable amount of burden from one party to another.
- A party must know the key terms: the legal language contained in the agreements are complicated. Therefore, it is important that the party knows about the key terms associated with the indemnity agreement. The party may look for the terms such as “hold harmless” and “obligation to defend.” These terms help in identifying that the given document is an indemnity agreement
- Be Aware of Scope and Depth: A party must take time and review or draft the indemnity agreement carefully and thoroughly. It is better that the party takes advice from a litigation lawyer to analyze its obligations and rights to determine if an indemnity agreement is right for it.
Irrespective of the role a party plays in this kind of agreement, it must have regard to the significant power it holds. Every party must take efforts to mitigate their legal risk. So, the parties should not be afraid of discussing it with legal professionals before entering into an agreement.
The provisions of an indemnity agreement must be worded carefully to avoid legal errors that can result in an unenforceable document. Hence, it is advisable to hire legal professionals to obtain proper advice before signing any contract.
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