Indemnification, as defined by Merriam-Webster, is a security against hurt, loss or damage. In a more legal framework, it is defined as an exemption from incurred penalties or liabilities.
An indemnity agreement is a contract in which one party agrees to cover certain losses so the other party doesn't have to. It works much like a hold-harmless agreement: when a covered problem occurs, the party that accepted the risk pays for it.
Maybe you’ve signed a contract with a contractor who is going to work on your property or business. But what happens if one of the contractor’s employees are injured while working on your property? Without a clear agreement about who is responsible for an injury or damage to property, you could find yourself responsible.
An indemnity agreement settles the “who is responsible” question ahead of time. One party promises, in writing, to cover certain losses tied to the work, so the other isn't left with the bill. These promises appear in construction contracts, leases, and business sales. Because the wording decides who pays, they're worth having a lawyer draft.
Say a remodeling contractor digging near your storefront hits a water main, and water floods the shop next door. That owner sues you, since it's your project. Now you could be paying for a mistake your contractor made.
Before you face this kind of hassle, you want to add indemnity language to the construction contract. Sometimes it's drafted as a standalone indemnity form, meaning a separate document that holds just this promise, and in other cases it has a section embedded into the larger agreement In this deal, the contractor is the indemnitor. They took on the risk, so they pay for losses arising from their work. You're the “indemnitee”. The promise to be responsible for certain losses is called “indemnification.” You can look to the contractor to pay the neighbor's claim, and often your legal costs, too.
The wording determines how far that promise extends, which is why it's wise to familiarize yourself with common contract terms before signing. With a LegalShield® Small Business Plan, you can have a provider law firm review an indemnification agreement before your name goes on it.
Indemnity agreements appear wherever one party's work can create costs for another. Whether you run a growing LLC or a decades-old family shop, you're likely to see one eventually. They're common when third-party claims are foreseeable, such as work that could injure a bystander or damage a neighbor's property. But they can also cover who is responsible for a company’s own property and people. The company that controls the risk is usually the one asked to accept it, often inside its independent contractor agreement or service contract.
When a business gets sold, some problems only appear after the sale closes. Indemnification provisions determine in advance who pays. Equipment leases often ask the renter to cover damage that happens on their watch, and even software purchases contain indemnity language to help protect against misuse or trademark claims.
Courts read these provisions closely. When the two sides disagree over what the promise covers or the enforcement of the promise, the dispute can end up in civil litigation.
No two agreements cover the same things. However, the most common is a third-party claim, meaning a lawsuit from someone outside the contract. Many agreements also shift losses from contract breaches, careless work, or even fraud, depending on the language used. Sometimes indemnifications address each party’s losses, such as injury to workers or damage to property.
Some agreements also address who pays for attorney fees, fines, penalties, and other costs not associated directly with the loss.
Indemnification agreements and how much risk can be passed on varies across industries and business size, and even from state to state. A larger company may be able to accept more risk than a smaller company, like a home-based business.
Most indemnifications follow a familiar anatomy, whether they stand alone or live as a clause in a bigger contract. Here's what typically appears:
Standalone agreements may reference what state laws govern, and have signature lines for both parties. If part of a bigger agreement, the provisions might be spread out in the contract.
Some standalone indemnity agreements add other provisions that are not necessarily related to indemnification, such as confidentiality, insurance and payments. A provider law firm can review these agreements before you sign.
Courts generally defer to the contract terms when hearing a dispute about indemnification. However, if an indemnification is written unclearly, or is adverse to law, then the court is tasked with making the decision about the intent of the indemnification and who is responsible. This can be a lengthy and costly process, so it is important that your indemnification is clear and complies with your state’s laws.
If you are found not responsible for losses under an indemnification, then you may be entitled to costs related to the defense and any other damages you may have incurred. A well-written provision about expenses in this situation can help make you whole, so don’t ignore this important provision within an indemnity agreement or provision.
An indemnity agreement can decide who absorbs the costs when a project goes wrong. It’s one of the more consequential business legal issues in everyday paperwork. The form, the wording, and your state's law each shape what the promise is really worth.
With a LegalShield Small Business Plan, you can speak with a provider law firm before you take on someone else's risk or hand over yours. Plans include consultation on an unlimited number of business legal matters and document review for a fraction of typical law firm hourly rates.
Learn more about contract review with a LegalShield Small Business Plan and get guidance before you sign.
The two overlap and often are used in the same sentence. An indemnification is a promise to pay covered losses back after they happen. "Hold harmless" is a promise not to hold the other party responsible in the first place.
Neither on its own. It's a tool for moving risk, so it tends to feel like a win on the receiving end and a weight on the giving end. Whether it's fair in your deal comes down to the wording, which is worth a professional read before signing.
The indemnitor, meaning the party that made the promise, pays the covered losses. In practice, that payer might be a corporation, a PLLC or LLC, or an individual, and an insurance policy often stands behind the promise.
An indemnity contract is simply another name for an indemnity agreement. Whether the document is labeled a contract, an agreement, or a clause inside a larger deal, the promise is that one party agrees to cover certain losses for the other.
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