Indemnification clauses appear in many commercial contracts. Indemnification generally means one party compensating the other for losses or liabilities due to a third-party claim.
The purpose of an indemnification clause is to allocate risk between the parties to the contract.
There are many benefits to an indemnification clause
An indemnification clause protects your business from lawsuits or damages that the other party can handle. It also allows you to tailor the amount of risk you are willing to take with certain parties and business transactions.
Additionally, an indemnification clause could allow you to recover certain types of losses that you might not otherwise be able to recover if you had to file a lawsuit yourself, such as court costs.
Components of an indemnification clause
Typical indemnification clauses include an obligation to indemnify and an obligation to defend. The obligation to indemnify requires reimbursement to the other party for the transactions you agree upon. Reimbursement usually includes payment for liabilities, claims and related costs and expenses.
An obligation to defend requires reimbursement to the other party for expenses they have already incurred and in some cases the requirement to assume responsibility for the third-party lawsuit altogether.
Exceptions to indemnification
There are some exceptions to indemnification. They usually involve situations where the indemnified party’s own conduct contributed to the lawsuit.
Indemnification clauses commonly relieve a party from indemnification for claims involving bad faith or negligence.
How to draft indemnification clauses
When drafting indemnification clauses in your business contracts, be specific. Include exactly how the indemnification between parties will occur and list the duties of the indemnifying party and the indemnified party.
List exactly what type of claims are covered by the indemnification clause and the steps to follow to obtain compensation. Many indemnification clauses include liability limits so the indemnifying party does not risk damage to their business.
Indemnification clauses are an important part of many business contracts. They can help you with business planning by allowing you to determine the amount of risk you are willing to take.