Indemnification is a common form of protection that parties creating and agreeing to contracts include within those contracts. Indemnity’s definition is: compensation for damages or loss or an exemption from liability for damages. Indemnification is most commonly installed as an agreement between two parties as an indemnification clause within a contract. It creates a legally enforceable arrangement within the agreement where one party agrees to pay for potential losses or damage. Signing and being a party to a contract with an indemnification clause can protect you from liability or damages or, from the other side, create liability for damages or loss sustained by the other party of the contractual agreement. An indemnification clause is usually beneficial for both parties.
Why are indemnification provisions important in business?
Indemnification clauses allow business owners to establish the amount of risk they are willing to undertake in each transaction and with every counterparty to which they are doing business under a contractual agreement with. This is a great way for business owners to plan and be prepared for any potential business losses or unexpected costs stemming from a transaction or agreement with another party. Both of which should be done with a proper contract which the talented business attorneys at EPGD Business Law are happy to assist with. A very important and beneficial aspect of indemnification clauses is that it protects a contracting party from damages and lawsuits that are more efficiently borne or more reasonably controlled by the counterparty. For example, a cafe in Miami that purchases food supplies from a food supplier in Florida agrees to indemnify the food supplier from any lawsuits that may arise from the cafe’s preparation of the food they purchased. Since the cafe has more control over how the food is prepared, inspects the food before final purchase, and follows strict health code guidelines they are in a better position to mitigate losses and liabilities related to the goods they are selling.
This indemnification clause benefits both parties but puts the food supplier in a better, protected position.
What is the structure of a typical indemnification clause?
A typical, effective indemnification clause consists of two separate and distinct obligations:
- An obligation to indemnify the other party
- An obligation to defend the other party
Obligation to indemnify:
The obligation to indemnify legally requires the indemnifying party, the party agreeing to take
on more liability for damages, to:
- Reimburse the indemnified party for paid costs, expenses, and any losses that may stem from the work performed or related business transactions between the parties.
- Reimburse for losses or expenses that stem from the products supplied or created for the contracted transaction.
- Advance payment to the indemnified party for its unpaid costs and expenses, such as:
- Liabilities
- Claims
- Causes of action
Obligation to defend:
The indemnifying party, which is the party agreeing to financially cover and pay for agreed upon costs and expenses, the obligation to defend consists of two things:
- First, an obligation to reimburse paid defense costs and expenses. Which often include attorneys fees, arbitration costs, court fees, or other litigation costs for anything arising from the agreed upon contract.
- Secondly, the indemnifying party has the right to assume and control the defense of the third-party suit. Effectively taking the reins to proceed with hiring attorneys and conducting the defense work by their terms. EPGD Business law has attorneys that can assist with this legal work as well.
Are there limitations on the indemnifying party’s obligation to indemnify?
Yes, the indemnifying party’s obligations to indemnify is limited to recoverable damages caused by, related to, or resulting from covered events as agreed upon by the parties. This is where having a written contract is especially important because what the covered events are need to be clear for both parties but especially for the indemnifying party that is taking on more financial risk.
Covered events are specific events that can cause damage or losses to the indemnified party. They can vary widely and are aligned with the particulars of the transaction plus subject to negotiation. The most common covered events in Miami and Florida are:
- Breach of contract
- Negligence
- Bodily injury or death
- Non-compliance with state or federal law
If you have questions regarding indemnification or any parts of business law the talented attorneys at EPGD Business Law would be more than happy to assist you.
