Generally speaking, entering into business contracts with other individuals or business entities may mean exposing your organization to potential liabilities arising from the activities undertaken as part of the contract. However, dealing with some liabilities and risks can adversely affect your organization’s financial health and reputation. This is where indemnification agreements enter the picture.
Essentially, indemnification agreements are contracts designed to protect one party to a transaction against certain liabilities and losses. They enable businesses and other organizations to perform their duties and responsibilities in the contract without being held accountable for the problems that may happen outside their control. Some other terms for indemnification agreements can include the release of liability, no-fault agreement, and hold harmless agreement.
On the other hand, indemnification agreements can be considered complex commercial contracts. As such, getting familiar with these documents is essential to ensure your business receives the proper protection.
Below are the four things you need to know about indemnification agreements:
Different Types Of Indemnification Agreements And Situations
There are two main types of indemnification agreements. These can include:
- Express Indemnity Agreements: These are written contracts that expressly outline the specific terms and conditions that both parties need to follow throughout the duration of the agreement.
- Implied Indemnity Agreements: These are contracts wherein the obligation for which the indemnifier can be held accountable to the indemnitee isn’t expressly written or named in the agreements.
On the other hand, there are also many types of indemnification situations to be aware of, which include:
- Insurance: When an individual gets involved in an accident that results in an injury to another person, indemnification contracts may be issued to people taking insurance for protection.
- Licensing: Indemnification agreements are available in a licensing situation wherein a party employs a service that’s also contracted out to another party.
- Construction: Release of liability agreements are also helpful in situations wherein the construction builder makes a liability claim regarding the quality of the products being used.
Indeed, some situations warrant the use of indemnification agreements. But aside from the ones mentioned above, these agreements are essential in an employment setting because they also allow employers to set certain cap limits on the costs and expenses arising from the liability of the employees.
For example, if you’re an employer, you may include an indemnifying clause in all your employment contracts as protection against any damages or losses incurred due to employees’ actions or negligence.
Important Terms/Provisions Included In The Agreements
Generally, indemnification agreements differ from one business to another. But despite the differences, most agreements should include the following terms/provisions:
- Parties Involved: They consist of the indemnifiers or the parties warranting the protection to minimize the harm to the other party and the indemnitees or those protected by the agreement.
- Damages Or Losses: The agreements should include a provision stating that it releases the indemnitee from the responsibility for damages or losses.
- Statement Of Protection: The agreements should include a statement stating that the indemnifier ‘indemnifies or holds harmless’ the indemnitee from liability.
- Indemnity Period: The indemnification agreements provide a certain period when the contract is in effect.
Limitations On Indemnification Agreements
Indemnification agreements also provide some limitations in terms of the indemnification’s obligation to indemnify. These can include:
- Covered Events: These are one of the limitations of indemnity agreements, which means that the indemnifier’s responsibility to indemnify is only limited to covered events or those listed in the indemnification agreements. Some common covered events that may be subjected to release of liability contracts are a breach of contract, non-compliance with the laws, injury or death, and negligence.
- Use Of Indemnity Cap: Parties can also utilize the said agreements to provide an indemnity cap, which means that the indemnifying party will only be liable for a certain amount of money even if the damage or loss exceeds it.
Exceptions To Indemnification Agreements
Apart from the limitations, there are also exceptions to indemnification agreements. These consist of situations wherein the indemnitee’s actions cause or contribute to the damage, loss, or other burdens that give rise to liability.
That said, indemnification agreements may include a provision stating that the indemnitee may not be indemnified due to the following situations:
- Commission of a criminal offense, unless there’s a sufficient basis to believe that the indemnitee doesn’t know the act was unlawful
- Bad faith in complying with the terms and conditions of the contract
- Improper use of the products or services involved
As a business owner, having indemnification agreements can help your organization safeguard itself against certain liabilities. With these documents in place, you can save more money in damages and losses and preserve your business’s good reputation. Therefore, keep the above information in mind if you’ve decided to enter into indemnification agreements with other businesses and individuals. That way, you’ll know how these contracts can work best for your organization.