An indemnity clause is a type of agreement wherein one party agrees not to hold another party liable if certain injuries or losses occur. The other party agrees to pay for any potential losses or damage.
An indemnity clause is usually a contract provision included as a part of a longer contract regarding the purchase of a product or the provision of services. Indemnity clauses also appear often in insurance policies.
In an insurance contract, the insurance company, which can be referred to as the “indemnitor,” agrees to compensate the insured, or the “indemnitee,” for any damage or loss that the insured suffers in certain situations. In return for this indemnification, the insured pays premiums for the insurance coverage. So, the insurer indemnifies the policyholder, promising to make them whole after they suffer losses covered by the policy.
Indemnity clauses are also common in contracts for the rental of products. For example, when a person rents a car, as part of the rental agreement, the customer is usually required to sign an indemnity clause. The clause usually states that they will not sue the rental company if they get into an accident while renting the car.
The customer who rents the car agrees to assume liability for damage to the car and any other losses that may arise, e.g., injury to others, if there is an accident. The rental company’s exposure to liability is greatly limited. In this way, the rental company avoids the possibility of being the subject of lawsuits.
Indemnity clauses can be used in all kinds of commercial contracts and in contracts of other kinds as well. They are common for participants in events that involve high-risk sports activities. They are generally used in this context to relieve the event sponsors of liability for injuries to the participants.
When Are Indemnity Clauses Used?
As noted above, Indemnity clauses are common in most insurance policies. Generally, the purpose of an indemnity clause in an insurance policy is to prevent the filing of frivolous lawsuits for claims for which the other party could not reasonably be liable.
Indemnity clauses are often used when there are certain identifiable and foreseeable risks associated with a product or service. If these risks are not dependent in any way on the seller’s actions, then an indemnity clause may be appropriate. For example, the patrons of amusement parks are often asked to sign indemnity agreements upon their entry to the park.
What Are the Different Types of Indemnity Clauses?
Some of the different kinds of indemnity clauses are as follows:
- Bare Indemnity Clauses: Bare indemnity is when there is no limit on the potential liability of the indemnitor;
- Limited Indemnity Clauses: Limited indemnity clauses allow the party entitled to indemnification to recover for their losses except for those caused by their own negligence;
- Third-Party Indemnity Clauses: Third-party indemnity clauses assign liability for any losses to some third party to the transaction or situation;
- Financial Indemnity Clauses: Financial indemnity clauses are triggered when a party fails to fulfill fiduciary obligations;
- Party Indemnity Clauses: Party indemnity clauses agree to indemnify each other if a negligence or breach of contract claim arises.
Can an Indemnity Clause Be Disputed?
Indemnity clauses can be powerful legal tools because they can relieve a person or entity of a liability that they might otherwise have. Therefore, indemnity clauses should be used cautiously, and a person should agree to them with a full understanding of their legal effect.
Of course, lawsuits concerning indemnity clauses are always a possibility, and parties may even file frivolous lawsuits in connection with indemnity clauses.
Contract laws demand that indemnity clauses meet certain requirements in order to be legally valid and enforceable. For example, they cannot be agreed to under circumstances involving deceit, fraud, coercion, or threats of harm. Their effect can be avoided If a person who gave up a right to claim liability on the part of a third party can prove that they agreed to the clause because of a fraudulent misrepresentation or coercion, then the clause would not be valid.
Both sides need to have a clear understanding of the meaning of an indemnity clause. Neither party should be mistaken as to the meaning of any terms that might be considered potentially vague or ambiguous. Theoretically, an indemnity agreement might be part of an oral agreement. However, it is best if an indemnity clause is formally agreed upon as part of a written contract rather than an oral one.
Indemnification provisions are generally enforceable. However, under certain circumstances, courts do not enforce them as follows:
- Indemnification clauses that require one party to indemnify another party for any claim regardless of fault are not enforced because they are viewed as being contrary to public policy;
- Some states have laws that prohibit indemnification clauses that call for the payment of punitive damages;
- Courts have commonly held that a person cannot recover compensation for damages per an indemnity clause if the damages can be characterized as unforeseeable and an unlikely outcome of the other party’s breach of a contract, negligence, or misconduct.
Indemnification clauses should be drafted clearly and carefully, with careful consideration given to all of the circumstances in which they are used. If a clause is ambiguous, courts usually resolve the ambiguity in favor of the party who owes indemnification to another.
What Is the Difference Between an Indemnity Clause and a Guarantee?
Under certain circumstances, a guarantee and an indemnity clause might be the same. A guarantee can be a formal promise on the part of one person to pay another person’s debt or to perform another person’s legal obligation if the other person defaults.
In other contexts, a guarantee is something different from an indemnity clause. For example, a guarantee can be a formal promise that a product will be repaired or replaced if it is not of a certain quality or does not last for a specified period of time. It can be something like or even the same as a warranty.
In other contexts, a guarantee is a promise by a guarantor to pay another person’s financial obligation, e.g., a loan, in the event that the debtor defaults on the loan. Such guarantees are often used by people whose credit scores are such that they cannot qualify for a loan without a guarantee of repayment from a third party. So, there can be similarities and differences between indemnity clauses and guarantees.
Do I Need a Lawyer for Help With Indemnity Clauses?
If you are involved in a dispute regarding an indemnification agreement, you want to consult an experienced contract lawyer. LegalMatch.com can refer you to a lawyer with the experience you need. Your lawyer will be able to review any agreement to which you are a party and advise you as to what the clause means and whether a court is likely to enforce it. Your lawyer can advise you about your rights and obligations under the clause.
Or you may be entering into a commercial contract, or perhaps you are a sponsor of an event that involves high-risk activities on the part of the participants. You, too, should connect to a contract lawyer through LegalMatch.com for expert help in drafting the appropriate indemnity clause for your situation, one that will best protect your rights.
Or you may be in a situation in which a lawsuit regarding an indemnity clause is already underway. Again a contract lawyer with experience in these clauses is the professional with whom you need to consult.