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Understanding Indemnification Clauses

Written by Sorin Leahu on March 26, 2021 Category: Business Law & Transactions, Contracts

If you have ever read a contract, it is likely that you would have come upon an indemnification clause.  These clauses tend to be placed towards the end of a contract and can be confusing for many.

So what is an indemnification clause? Indemnification is defined as “making compensation for incurred hurt, loss, or damage.” These clauses are often referred to as “hold harmless” clauses because they are meant to shift liability from one party, the “indemnified party,” to another party, the “indemnifying party.” An example will help explain this a bit more.

Suppose you are a trucking company and a shipper hires your company to deliver goods to a retailer. Because all of your own drivers are already handling other loads, you hire an independent contractor to the deliver this particular load. The contract you enter into with the driver contains an indemnification clause which might read like this:

“Driver agrees to indemnify and hold Trucking Company, its officers, agents and employees harmless from any liability, loss or damage they may suffer as a result of claims, demands, costs or judgments against them arising out of the activities to be carried out pursuant to the obligations of this Agreement.”

Assume then that the driver begins delivery of the load but before reaching his destination causes a major accident as a result of his careless driving. The injured party files a lawsuit against the driver but also names the trucking company, who hired the driver, as a defendant in the lawsuit. The indemnification clause would then require the driver to compensate the company for losses the company sustains as a result of the lawsuit.

Essentially, an indemnification clause operates to compensate the indemnified party for any losses arising out of the indemnifying party’s actions or failures to act. Who stands to benefit from an indemnification clause depends on the circumstances. In the hypothetical above, the trucking company clearly benefits while the driver would have preferred to not have such a clause in the contract. If you are a party looking for indemnification protection, you want the broadest possible language which would cover all claims. In addition, you would also want an obligation for the indemnifying party to not just hold harmless, but also to “defend.” When the obligation to defend is coupled with the obligation to hold harmless, the indemnifying party must not only compensate for loss, but also defend, at its own expense, any lawsuits filed against the indemnified party. If you a party looking to avoid indemnification, you will need to try to narrow the scope of the indemnification clause, specifically define the acts for which indemnification can be made, and even negotiate a cap on damages. It is not uncommon, however, for a contract to have a mutual indemnification clause which indemnifies both parties in the same way.

Finally, it should be noted that while indemnification clauses are generally upheld by courts, there are situations in which they could be held invalid. These might include clauses which purport to require indemnification regardless of fault or which require indemnification of punitive damages.

If you have any questions about indemnification clauses, please contact the attorneys at Dalton & Tomich, P.C.

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