Guidance

Definition

Black’s Law Dictionary defines indemnity as: "A duty to make good any loss, damage, or liability incurred by another; or the right of an injured party to claim reimbursement for its loss, damage or liability from a person who has such a duty; or reimbursement or compensation for loss, damage, or liability in tort; especially, the right of a party who is secondarily liable to recover from the party who is primarily liable for reimbursement of expenditures paid to a third party for injuries resulting from a violation of a common-law duty." Black’s Law Dictionary, Seventh Edition.

Points of Negotiation

The main negotiation points are:

  1. Applicability: mutual or unilateral?
  2. Scope of the indemnity:
    • Indemnify and reimburse losses.
    • Duty to defend.
    • Hold harmless, bar to certain claims.
  3. Nature of the indemnified claims:
    • Third-Party Claims.
    • Direct (Inter-Party) Claims, based on breach of representation, warranty, or other contractual obligation.
    • Governmental claims based on regulatory matters (sometimes simply included in Third-Party Claims).
  4. Exceptions — No duty to indemnify if the Indemnitee caused the losses intentionally or negligently.
  5. Limitations:
    • Time
    • Amount
  6. Procedure:
    • Requirements for recovery (notify the indemnity, cooperate, and provide necessary documents).
    • Duty to mitigate damages.
  7. Exclusivity of remedies — Is indemnification the only remedy when it comes to the covered claims?

Scope of Indemnification

The scope of indemnification contains three sub-elements: (a) indemnify, (b) defend, and (c) hold harmless. Research suggests that the clause need only include indemnity. Courts have commonly interpreted "Indemnify" and "Hold Harmless" as synonymous, and usually interpret "Indemnity" as containing "Defense" as well. It is becoming less common to see "Hold Harmless," and including it will primarily add confusion and complexity in interpreting it's meaning. On the other hand, "Defense" remains a common element in Indemnification clauses.

1.1 Indemnify - Duty to Reimburse Losses

The requirement to indemnify is an obligation to compensate the covered party for any losses or liabilities incurred by the indemnified party. Typically, the claims relate to losses incurred by the indemnified party caused by the indemnitee or brought by third parties against the indemnitee.

1.2. Defend - Duty to Provide a Defense

The duty to defend is an obligation to provide a defense against a covered claim. The obligation is distinct from the duty to reimburse losses.

First, the scope of the duty to defend may differ from the obligation to compensate for losses. “Because the duty to defend and the duty to indemnify are distinct obligations, the contract may impose a duty to defend the underlying claim even in the absence of a duty to indemnify.” Hollingsworth v. Chrysler Corp., 208 A.2d 61 (Del. 1965). In other words, the contractual duty to defend a claim may be broader than, and arise more often than, the duty to provide indemnity from a loss or judgment." Drafting And Enforcing Complex Indemnification Provisions, D. Hull Youngblood, Jr and Peter N. Flocos, K&L Gates, August 2010.

Second, the duty may be triggered at different times. The requirement to defend is triggered as soon as a claim made. In UDC-Universal Development v. CH2M Hill, the California Court of Appeals concluded, "[t]he contract between CH2M Hill and UDC called for a defense when any claim against UDC implicated CH2M Hill's performance of its role in the project. That defense obligation arose when the HOA alleged harm resulting from deficient work that was within the scope of the services for which UDC had retained CH2M Hill."

In negotiation, potential indemnitors may seek to strike any duty to defend language. “There is no common law duty of a consultant to defend its client against third-party actions. That duty can only arise as a result of a contractual liability created through the indemnification clause of the contract. Since this is a contractual liability, it is excluded from overage pursuant to the contractual liability exclusion of the errors and omissions policy.” Indemnification Clauses: Uninsurable Contractual Liability, J. Kent Holland, J.D., ConstructionRisk, LLC.

However, under California’s Code, defense obligations “are deemed included in every indemnity agreement unless the parties indicate otherwise.” Crawford v. Weather Shield Mfg., Inc., 187 P.3d 424, 44 Cal.4th 541 (2008).

1.3. Hold Harmless - Bar to Claims

In strict terms, the statement “to hold harmless” means to exonerate another from liability. Sarah E. Swank writes that "[a] hold harmless provision means that an organization is not liable for certain damages under an agreement. This clause effectively bars the party responsible for indemnification from bringing suit against the party being indemnified." Clarifying the Confusing World of Indemnification, Hold Harmless and Defense Clauses, January 2013.

In the case of Queen Villas Homeowners Ass'n v. TCB Property Mgmt., 56 Cal. Rptr. 3d 528 (Cal. Dist. Ct. App. 2007), the Court stated: "Are the words 'indemnify' and 'hold harmless synonymous?” No. One is offensive and the other is defensive-even though both contemplate third-party liability situations. ‘Indemnify’ is an offensive right – a sword – allowing an indemnitee to seek indemnification. ‘Hold harmless’ is defensive: The right not to be bothered by the other party itself seeking indemnification.” Nonetheless, the court concluded that the language of the indemnity term “should not be construed in an exculpatory manner.”

However, common practice indicates that the terms “indemnify” and “hold harmless” are interchangeable. For example, Black's Law Dictionary treats them as synonyms. As a term of art, “hold harmless” is generally interpreted to mean to protect another against harm or damage.

Most commentators propose the use of both terms. (See, Are "Indemnify" and "Hold Harmless" the Same?). For example, Sarah Swank counsels that it is "[g]enerally, it is advisable to include both indemnification and hold harmless language because of the variety of definitions of hold harmless." (http://www.ober.com/publications/2113-clarifying-confusing-world-indemnification-hold-harmless-defense-clauses) However, the same argument – that the terms covers a broader range of outcome – can also be interpreted as creating uncertainty, and for this reason, others strongly advise against its use. (See, Yet More on "Indemnify" and "Hold Harmless" and Revisiting "Indemnify"Ken Adams.

The clearest position is to exclude the term “hold harmless,” unless the parties intend to bar claims by the indemnitor, in which case the language should be clearly expressed to address such a bar to claims.

2. Nature of the Covered Claims

The nature of the indemnified claims may cover third party and, more controversially, inter-party claims. 

2.1. Third Party Claims

An indemnity is most commonly used to cover third party claims, whether brought by an individual, entity, or governmental authority. For example, a licensee of software can seek indemnification from the licensor in the event the licensee is sued by a third party for infringement.

2.2. Direct (Inter-party) Claims

Historically, indemnities covered only third party claims. However, in recent years, and particularly in the United States, the scope has been expanded to include inter-party claims. IP Draughts suggests that the use of inter-party indemnities have been driven by the belief, in the US that: "if a winning party in contract litigation is to recover its legal costs, an indemnity is required.  This is because the courts in the US do not generally award a winning party its legal costs.  English law in this area is very different; usually the winning party is awarded some or all of its legal costs." Inappropriate use of indemnities, IP Draughts, June 29, 2011.

However, a right to attorneys' fees can be covered with a separate without the need for an indemnity that may have other effects.

The use of an inter-party indemnity is a balancing act:

(a) one the one hand, an inter-party indemnity, combined with an exclusive remedy provision, may reduce the common law rights of the indemnified party (such as specific performance), but

(b) on the other hand, the presence of an indemnity may eliminate the indemnifying party's need to prove causality between the breach and loss, and may obviate the requirement of mitigation. (However, case law indicates that mitigation may still be required.) 

3. Limitations

3.1 Time

An indemnity may also include a time limit for filing an indemnity claim and may seek to reduce the statutory limitations. Depending on the jurisdiction, some courts have enforced such terms. (See: Parra v. ADT Security Services Inc., Home Owners Insurance Co. v. ADT LLC). However, certain states, including Florida, Alabama, Idaho, Mississippi and South Dakota have statutory provisions that void contract terms attempting to shorten statutory limitation periods. (See: Using Contract Provisions To Shorten The Time To Sue, Law360, New York (September 21, 2015).

3.2 Amount

Typically, indemnities for third party claims are uncapped because the risk cannot be predicted. On the other, exposure for inter-party claims can usually be capped as the value of the transaction. ...puts it succinctly: "Think of a simple example: I bought a widget from you for $5; the widget was broken; I want my $5 back directly. I don’t need $1mm of coverage, I just need my $5 back." By contrast, a third party claim for product liability may not be limited to size of the deal.  What is a Cap on an Indemnity Clause and Why Should I Care?, Member (Partner) at Outside GC LLC

3.3 Statutory Limitations on Indemnity for Negligence

Regulated businesses providing essential services

Construction contracts

4. Overbroad Clauses

Excessively broad language, often the result of careless drafting or over-reaching by one party may seek to shift liability where the indemnifying party is not at fault. For example:

"any use of the licensed products."

"any liability arising out of the performance of services under this agreement."

"any liability arising out of or connected with this agreement."

About

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  • Updated: 04/15/2020
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Overview

An Indemnification clause acts an inter-party insurance policy, shifting risk and liability between the parties. It does so by creating the obligation that one party (the Indemnitor) will pay for losses the other party becomes liable for (the Indemnitee), either for any losses related to the agreement, or for losses from certain types of claims.

A separate obligation, but also commonly included in the Indemnification clause, is Defense, where the Indemnitor will not only pay the losses of the Indemnitee, but will defend (hire a lawyer to defend) the Indemnitee against the claim in court. 

Indemnity can be limited not only to losses only from certain types of claims, but also to certain amounts of losses.

Finally, the common indemnification obligation is to indemnify the Indemnitee against Third-Party Claims, claims brought by someone other than the parties to the agreement. However, less common is the trend of some parties to indemnify each other against inter-party claims, also known as Direct Claims, claims that one party to the agreement brings against the other. The usefulness of Direct Claim indemnification is limited, and is typically meant to indemnify against claims relating to the representations and warranties made between the two parties. 

Our base clause is the simplest indemnification obligation. It is appropriate for simple, low-risk, and low-money value agreements. Including complex indemnification clauses can add signification negotiation and transaction costs, which may not be necessary for smaller, simpler agreements. Our variants add limits and exclusions to the Indemnification Obligation, indemnification procedures, and defense obligations, and are build in modules so as to be easily customizable by the user. They also enumerate what types of claims can be indemnified, including an option for the parties to specify their own specific covered claims they would like to indemnify against. The parties should decide together which of the enumerated covered claims they want to include, and whether to use the option of defining their own specific covered claim.

For more, see the Discussion below.

For more alternatives on scope of the core indemnification obligation, including variants tailored specifically to third party claims or direct claims, see our Indemnification Obligation clause.