An indemnification clause (also known as a “hold harmless provision”) is a part of a contract where the parties agree to shift potential costs or losses from one side to the other.

Basically, you are agreeing to insure or protect the other party against loss or reimburse them for loss under the contract in case things don’t go exactly as planned. Indemnification clauses can often be tailored to the specific needs of the parties in the contract.

How Far Can an Indemnification Clause Go?

Before signing a contract with an indemnification clause, make sure that you read it very carefully. You may want to have a business attorney review the contract with you, to be sure that you understand the legal consequences of signing the contract.

The force of the indemnity clause really depends upon how it is worded, and every word counts. You will want to make sure that the clause is phrased so that your obligation under the agreement is limited to your own mistakes or misconduct. If the clause is phrased too broadly, it may create a responsibility that you did not intend.

Are Indemnity Clauses Enforceable?

As a general rule, indemnity clauses are enforceable. There are some exceptions–for example, a clause that requires one party to indemnify the other for any claim of loss, regardless of who is at fault, would likely not be enforceable depending on where you live.

Additionally, claims for losses that were unforeseeable or improbable as a results of a party’s breach or negligence may not be enforceable. The point of an indemnity clause is to protect parties against damages that are likely or foreseeable at the time of contract.

When is a Business Indemnification Clause Used?

Indemnification clauses are standard in many business contracts, and often appear as part of a contract between two businesses or between a business and an individual. Certain business indemnification clauses are commonly used to protect the executives of a company (like officers or members of the board of directors) from lawsuits brought by the company’s shareholders.

The business promises that if an executive is sued for something that they’ve done for the benefit of the company, the business will take responsibility for that executive’s actions.

Indemnity clauses and indemnity agreements are common in construction contracts and in insurance. In construction contracts, the indemnity agreement attempts to protect the contractor from losses due to negligence.

In insurance, an insurance company may agree to indemnify a property owner from losses or damage to the property—the business owner transfers the risk of loss over to the insurance company.

They are also common in agreements that involve the sale of intellectual property rights–the seller will often agree to protect the buyer against potential liability associated with a copyright infringement suit by a third party.

Is a Release Clause the Same as a Business Indemnification Clause?

Release clauses are not the same thing as business indemnification clauses. Release clauses are agreements in which both parties agree to give up their rights to file a lawsuit against each other over a breach of the contract. Usually a release clause indicates other dispute-resolution options available to the parties they can use in lieu of a lawsuit, such as mediation, negotiation, or arbitration.

Is Having a Business Indemnification Clause a Good Idea?

Whether you need a business indemnification clause in your contract largely depends on the circumstances surrounding the contract. Generally, this clause can be a large financial liability for a party who doesn’t have the resources to protect the other party from lawsuits as required by the clause.

You will want to keep in mind your resources and finances when reviewing the contract, and think about whether you and your company would be able to fulfill the obligations outlined in the contract in a worst-case scenario.

Can I Avoid Having a Business Indemnification Clause in My Contract?

You never absolutely have to sign a contract—any party to a contract can refuse to sign if it contains a clause that they do not want in the agreement. You may be able to negotiate with the other party and have the contract rewritten so that it does not contain the clause.

If you are not willing to sign a contract with a business indemnification clause, you will want to read the contract carefully and make sure that there is no boilerplate language–many template contracts already include business indemnification clauses.

Do I Need a Lawyer If I Have Questions About a Business Indemnification Clause?

Business indemnification clauses may be difficult to read and understand quickly. If you have any questions or concerns about signing a contract, it is always a good idea to contact an experienced business lawyer before you sign.

A lawyer can help you review the contract to make sure the provisions read as you intend, and can explain your rights and responsibilities under the contract. A lawyer can also help you determine whether a business indemnification clause in your contract is in your best interests.