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Dottie Perry
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Indemnity Provisions: When Indemnification is to Your Benefit Depends on Where the Risk Lies

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"Indemnification" is not a simple legal concept, and is one which some lawyers and most non-lawyers struggle to grasp. Admittedly, I regularly confused "indemnification" and "subrogation" as a law student. Hearing a discussion about this same confusion among several lawyers recently, I thought it'd be helpful to provide a Legal Examiner post with a brief primer on indemnification, and an introduction to the broader issue of who benefits from indemnification provisions in contracts for services.

Contractual indemnification is defined as a provision in an agreement where one party (or both with a mutual indemnification provision) agrees to compensate the other for loss or liability arising out of the contract. The type of loss is usually described in broad terms in the indemnity provision, and can include all forms of litigation (claims, counterclaims, cross claims, grievances and appeals),all harm, bodily injury, property damage, liens, fees, judgments, attorney costs and any other fees and costs arising out of litigation related to the contract. Put another way, the indemnifying party (indemnitor) is managing the financial risk attendant to the contract for the indemnified party (the indemnitee).

Here's an exemplary provision:

Article IX -Indemnification

9.1 THE SUBCONTRACTOR shall indemnify and hold THE CONTRACTOR harmless from and against all claims, demands, costs, expense, liabilities and losses (including reasonable attorneys' fees and court costs) which may result against THE CONTRACTOR as a consequence of any alleged malfeasance, neglect or malpractice caused or alleged to be caused by the THE SUBCONTRACTOR, its employees, agents, contractors, or invitees in connection with the performance of services pursuant to this Agreement.

If it's a mutual or reciprocal indemnification provision, it will also contain the opposite of the above clause, to-wit:

9.2 THE CONTRACTOR shall indemnify and hold THE SUBCONTRACTOR harmless from and against all claims, demands, costs, expenses, liabilities and losses (including reasonable attorneys' fees and court costs), which may result against THE SUBCONTRACTOR as a consequence of any alleged malpractice, malfeasance or neglect caused or alleged to be caused by THE CONTRACTOR, its employees, agents or contractors, in connection with the performance of services pursuant to this Agreement.

A party should be wary of an agreement with a mutual indemnification provision if there is inherent danger or heightened risk to what the other party is bringing to the deal. In this instance, if it must be included at all, the provision should be slanted in favor of the party NOT engaging in the dangerous activity, and has, therefore, much less likelihood of being sued. Otherwise, the risk is not mutual, because one party is taking on the obligation of covering the cost of indemnification that is much more likely to arise than the other party's obligation.

Whether or not indemnitors are willing to enter into any indemnification agreement and accept such risk is usually decided by how badly the indemnitor wants the contract that contains the provision. Some lawyers in the construction industry have noted that it is usually required by prime contractors:

Project owners seek to shift the risks of claims and losses from themselves to the design professionals and the general contractor and, sometimes, its subcontractors. In turn, the general contractor will want to shift those risks, along with its own risks, to the subcontractors and suppliers. For example, the project owner who seeks to shift the risk to the general contractor will include in the contract with the general, a clause that clearly and expressly obligates the general to defend the owner from liability and pay any damages that may result from the performance of the work.

In the construction context, there are several additional types of indemnity contractors and their subs should become familiar with.

In every circumstance, if you are the indemnitor, it's wise to limit the scope of the indemnification provision, or the circumstances under which this provision can be triggered. A common way to do this is to limit indemnity for cases of negligence and wantonness, which are acts defined by state statute. However, whether you agree to it or not, some states prevent the shifting of risk for some types of conduct, like intentional harmful acts, which, if such indemnification were allowed, would exempt the bad actor from being held liable for the intentional harm he caused.

Indemnification clauses, either expressly or implicitly, often contain the separate and distinct duty to defend the indemnitee. As discussed above, the duty to indemnify only requires the indemnitor to reimburse the indemnitee for the expense of the indemnitee's alleged liability to a third party (a company or individual not a party to the contract that contains the indemnification provision). In comparison, the duty to defend the indemnitee requires the indemnitor to pay the entire cost of preparing and proceeding through the litigation in behalf of the indemnitee, from start to finish. An important distinction between the two duties is that the duty to defend only arises as soon as facts are ascertained which, if proved true, would give rise to a duty to indemnify, while the duty to indemnify only arises after the indemnitee's liability has been ascertained and proved.