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The Importance of Indemnity Provisions

On Behalf of | Feb 21, 2022 | Firm News

Indemnity clauses are often included in business contracts in order to allow one party to a contract to be liable  for any injuries, damages, or losses incurred by the other party. The indemnity clause will require the indemnifier to compensate the other party to the contract for recoverable damages from third-party claims. An experienced California business law attorney can enlighten you about the benefits of indemnity provisions and how to defend or enforce one.

At the Law Offices of Jerry J. Goldstein, we have the experience, diligence, and resources to help business owners navigate complex legal issues, including indemnification clauses. We are available to discuss your unique situation and enlighten you about the importance of indemnity provisions in a contract. Whether you are looking to enforce or defend an indemnity clause of a contract, we can offer you the knowledgeable counsel and advocacy you need and help you navigate key decisions.

The Law Offices of Jerry J. Goldstein is proud to serve clients throughout the Coachella Valley, including Palm Desert, California, as well as communities in and around Imperial, Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties, among others.

Understanding Indemnity Clauses

Indemnity can be described as a contractual agreement between two parties that clearly indicates a kind of insurance/financial compensation for any damages and losses incurred. Here, one party will agree to offer financial compensation or take on legal liability for any potential injuries, damages, or losses suffered by the other party.

An indemnity clause, also known as an indemnification clause, may be included in a commercial or business contract to allow one party (the indemnifier or indemnifying party) to compensate the other party (the indemnified party) in the contract for certain expenses, costs, or damages resulting from third-party claims. Indemnity clauses may be mutual or one-sided.

By way of example, in a contract for the sale of a business, it is typical for the seller to agree to indemnify the buyer for any claims asserted by a third-party against the buyer for actions occurring prior to the date of the sale, while the buyer agrees to indemnify the seller for any claims asserted against the seller for actions occurring subsequent to the date of the sale.

Below is an example of a basic mutual indemnification provision:

“Business A agrees to fully indemnify, hold harmless, and defend Business B and its directors, employees, officers, and stockholders from and against all actions, claims, damages, demands, suits, losses, liabilities, settlements, judgments, costs, and expenses to the extent arising out of its breach of this Agreement, and/or its negligence or willful misconduct.”

The indemnity clause is typically tailored in each contract to meet the client’s unique circumstances or business needs appropriate for that transaction.

Types of Indemnity Clauses

Here are the various types of indemnity clauses:

Bare Indemnity: This is when no limitation or cap exists on liability.

Reverse Indemnity: This allows an indemnifier to file claims against their own insurance company if the third party doesn’t pay.

Limited Indemnity: This allows the indemnifier to recover compensation for losses or damages other than for negligence.

Third-Party Indemnity: This assigns liability to a separate party or entity for losses.

Financing Indemnity: This will trigger when the indemnifier fails to meet their fiduciary obligations.

Party Indemnity: This allows both parties to indemnify each other in the event of negligence or breach of contract claims.

However, before you agree to an indemnity, go through the document carefully and ensure that your obligations are limited to your own negligence or misconduct. An experienced attorney can enlighten you about the benefits and drawbacks of each type of indemnity clause.

Why Indemnity Clauses Are Important

Indemnity provisions in business contracts are important due to the following reasons:

  • To avoid liability for actions caused by someone else
  • To indicate the amount of risk you are willing to undertake in every transaction
  • To protect you or your business from damages and lawsuits caused by the other party
  • To recover certain types of losses indicated in the clause
  • To protect the indemnified party from lawsuits filed by third parties

Indemnification clauses allow you to protect your business from financial losses resulting from the negligent actions or willful misconduct of another party or lawsuits from third parties. At the Law Offices of Jerry J. Goldstein, we pride ourselves in guiding clients through the entire process involved in drafting contracts for myriad business transactions, including the inclusion of indemnification provisions.

Enforcing an Indemnity Clause

Generally, indemnity clauses are enforceable. However, indemnity provisions that require a party to indemnify the other party for any claim, regardless of fault, violate public policy. Likewise, indemnification clauses that provide for punitive damages are prohibited in California.

Hence, for an indemnity clause to be enforceable, the provisions should be clear, equitable, fair, and broad enough to address each party’s concerns adequately. An experienced business law attorney can help review the indemnity clause of the contract and make sure it is valid and legally enforceable.

Experienced Legal Guidance

Indemnity clauses usually result in very specific legal consequences. By signing a contract containing an indemnity clause in which you agree to indemnify the other party to the contract under certain circumstances, you will be automatically giving up your right to sue the other party for the reasons stated in such clause. Therefore, before signing the agreement, it is important that you consult with an experienced business law attorney to review the indemnity clause and help you understand your legal rights.

At the Law Offices of Jerry J. Goldstein, we’re dedicated to providing knowledgeable legal guidance and advocacy to clients in indemnity and indemnification clause-related matters. As your legal counsel, we can discuss the indemnity clause with you, enlighten you about your legal rights under the contract, and make sure it is in your best interest. Also, our trusted team can help enforce or defend an indemnity clause, file a claim for damages in court, and attempt to recover the legal remedy to which you are entitled.