The Importance of Indemnity Clauses
Nov. 15, 2022
An indemnity clause is one of the most contentious and litigated elements in any commercial contract. Some people are reluctant to sign contracts that contain indemnification provisions. However, many people do not understand the importance of indemnity clauses and how they can impact their business.
As a business attorney at Martinez Law Office, Inc., I assist clients with drafting commercial contracts that contain indemnity clauses. Whether you want to enforce or defend an indemnity clause, I can help you protect your rights while minimizing legal risks. With an office in Santa Ana, California, I serve individuals and businesses throughout Southern California, including San Diego, Orange, and Los Angeles counties.
Understanding Indemnity Clauses
Indemnity clauses, which are also referred to as indemnification clauses, are included in a contract between two or more parties. The clause requires the indemnifying party to reimburse the indemnified party for damages and losses incurred by the latter when specified events or circumstances occur.
The American Bar Association defines indemnification as the “practice of guaranteeing a third-party claim against a counterparty.” Essentially, the indemnity clause formally transfers the risk of potential liability from the indemnified party and requires the indemnifying party to absorb the losses caused to the indemnified party.
What is covered by the indemnity clause depends on the specifics of the contract. An indemnity clause typically consists of two elements:
The circumstances or events that would trigger the indemnity; and
The damages and losses the indemnifying party should be liable for.
Before signing a contract that contains an indemnification clause, speak with an experienced attorney to help you review the potential contractual risks and, if necessary, negotiate different terms on indemnification.
Types of Indemnity Clauses
There are various types of indemnity clauses that can be included in a contract, including:
Bare indemnities, which do not set out any specific limitations, require one party to indemnify the other party when specified events or circumstances occur.
Reversed (reflexive) indemnities require one party to indemnify the other party against damages and losses incurred as a result of the indemnified party’s own misconduct or acts.
Limited (proportionate) indemnities require one party to indemnify the other party against all damages and losses except those incurred as a result of the indemnified party’s own misconduct or acts.
Third-party indemnities require one party to indemnify the other party against claims by or liabilities to third parties.
Financing indemnities require one party to indemnify the other party against losses incurred as a result of a third party’s failure to honor financial obligations.
Party/party indemnities require both the indemnifying party and the indemnified party to indemnify each other for losses caused by the indemnifier’s failure to fulfill contractual obligations.
If you are drafting a commercial contract and considering using an indemnity clause to protect your business from liability, discuss the different types of indemnity clauses with a skilled attorney. As a business attorney at Martinez Law Office, Inc., I can help you understand your options and choose the most appropriate type of indemnity clause for your specific circumstances.
Why Indemnity Clauses Are Important
In many commercial contracts, indemnification provisions require one party to indemnify and “hold harmless” the other party for specified events and circumstances. Indemnity clauses are important because they allow the indemnified party to:
Protect the indemnified party from lawsuits filed by third parties
Manage the risks associated with a contract
Get compensated for any damages or losses it incurs when specified events or circumstances occur
Let’s review some examples of indemnification clauses:
Example #1: A rental car company signs an agreement with a customer that requires the customer to indemnify the company for any damages caused by the customer while driving the rental vehicle.
Example #2: Company A buys a product from Company B and intends to use it as part of doing business. An indemnity clause would require Company B to indemnify Company A for claims filed by third parties for injuries or harm suffered while using the product.
If you are considering drafting a contract that contains an indemnity clause, contact a knowledgeable attorney to help you draw up an enforceable indemnity clause.
Exceptions to Indemnification
When drafting or signing a contract that contains an indemnity clause, you need to understand the possible exceptions to indemnification. Typically, exceptions to indemnification relate to situations in which the indemnified party’s own misconduct causes or contributes to the circumstances or events that trigger indemnification. Exceptions to indemnification may apply when circumstances or events that trigger indemnification occur because of the indemnified party’s:
Gross negligence or ordinary negligence
Improper use products
Failure to fulfill its obligations under the contract
In some cases, the indemnified party may seek to exclude specific exceptions to ensure that they are compensated for their losses and damages even if their own negligence or gross negligence causes or contributes to the event that triggers indemnification.
Get Experienced Legal Support
If you are considering using an indemnification provision in your contract, I can help you draw up an indemnity clause tailored to your circumstances. Alternatively, if you were asked to sign a contract that contains an indemnity clause, I can protect your rights and help you understand your contractual obligations. Get experienced legal support you can trust by contacting Martinez Law Office, Inc., and scheduling a case evaluation.