What is indemnity and why is it used in contracts?

Indemnity is a contractual obligation whereby one party has to compensate the other party for some form of loss incurred. The primary purpose of indemnity is to usually hold parties accountable to the contractual obligations of an agreement. It is often used in contract negotiations as a form of insurance or compensation provision. It is an important provision where the Indemnitor(insurer) agrees to compensate the Indemnitee(insured) for any damages or losses.  Indemnity insurance is a way for a company (or individual) to obtain protection from indemnity claims by protecting the holder from having to pay the full sum of an indemnity, even if the holder is responsible for the cause of the indemnity.


It is widely used across various industries from medicine to e-commerce. It is unavoidable and quite standard in most cases. However, indemnity clauses can be costly to companies and the loss is not always just financial. Let’s look into how one can protect themselves from indemnity claims. 

First lets us understand how indemnity works.

Depending upon the agreement, an indemnity provision will cover different things. Contracts will usually mention that indemnity guarantees that both parties agree and shall meet contractual stipulations. When they fail to uphold this, compensation has to be made. Compensations can be paid in cash, by means of repair or replacement depending on the agreement. Indemnities are not upheld forever and there is a time frame during which the payment is valid.


Indemnity claims will vary according to the type of agreement signed. Depending upon the type of indemnity agreement, the consequences will be different too. Here are some practices to keep  yourself safe from indemnity claims:

Ensure that you do not breach anyone else’s intellectual property rights while promoting your business. This can include minor activities such as copying content or using pictures from another firm’s website without the appropriate permission.

Steer away from making defamatory statements. Do not make damaging claims that can cause defamation of any other business or person. This can leave you vulnerable to indemnity claims. 

Be careful about sharing or disclosing private and confidential information. Do not do so without consent. Further, be careful when you are dealing with information that is considered commercially sensitive. For example, if you hold some information that has been signed under an NDA, never disclose it for it can be legally actioned upon. 
You can also take numerous steps while drafting the contract itself to keep you safe and protect you from indemnity claims. Firstly, always go through the contract as many times as you need to and ensure that it is airtight. Have straightforward terms mentioned in your contract. Do not leave anything unambiguous. For instance, if your indemnity term states that damages will be paid for; define what consists of damages and what does not. Be as explicit as possible.  Also, always keep records of your contracts and record all changes made. Also, always mention the exceptions for the indemnity too. The condition under which the indemnitee will not be protected has to be specified as well.

Further, one might think they are only accountable for their own actions but indemnity claims can be made for appropriate matters related to third parties which happen to fall outside the responsibility of indemnity as well. They can include issues such as environmental risks, litigation, and product liability matters. Always be sure to consider all of these and weigh them in while you negotiate the terms of your indemnity agreement.

Conclusion

Indemnity claims can come in all forms and shapes. Companies as well as individuals could be sued for indemnity claims for varying reasons. For instance, companies could face an indemnity claim for breaking the terms of the employment agreement that they signed while onboarding new employees. Similarly, E-commerce startups could be held liable for false marketing or misuse of IP such as images without credit. There are numerous situations that could trigger an indemnity claim and so, the best way to protect yourself from indemnity claims is to follow good and ethical business and trade practices and always have an air-tight agreement in place. 

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