Indemnification clauses are one of the most commonly used–and sometimes misunderstood–clauses appearing in a variety of different types of contracts.
The purpose of indemnification clauses is to allocate the risk of liability between contracting parties. In the typical situation, the indemnifying party promises to defend or reimburse the indemnified party for damages stemming from claims made against the indemnified party by a third-party claimant.
To assure the indemnified party is protected, many indemnification clauses will also include a (1) duty to defend and/or (2) a duty to reimburse. A duty to defend is an obligation of the indemnifying party to provide an attorney for the indemnified party to defend against claims that come under the contract. A duty to reimburse means the indemnified party must first pay for their own defense attorney but that the indemnifying party will eventually reimburse them for the cost of the defense attorney.
The duty to defend involves the indemnifying party paying for the defense costs and expenses of the indemnified party, or the indemnifying party assuming control over the indemnified party’s defense in court. The duty to defend is broader than the duty to reimburse, as the indemnifying party will be required to defend the indemnified party regardless of if damages are assessed against the indemnifying party, whereas the duty to reimburse can only be triggered if there are damages or a judgment entered against the indemnified party.
Indemnification clauses are usually negotiated as part of the contracting process between the parties. Therefore, the parties have the ability to craft a clause that addresses their needs and concerns. These clauses can be limited to certain types of damages and claims by third parties, such as damages for bodily harm arising from negligence or economic damages resulting from a breach of contract. These clauses can also cap damages at a certain amount or be broad enough to include payment of the indemnified party’s attorney’s fees. The parties also have the ability to exclude certain claims and damages from indemnification clauses, such as claims based on recklessness or willful misconduct.
Having a good understanding of the allocation of risk and potential exposure for your business is critical. At Burnham Law, our team has experience with drafting and negotiating indemnification clauses as part of the contract formation process, as well as experience with litigating claims for indemnification that may arise after the contract has been executed. Contact us today to make sure you’re protected.