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What Is Indemnification? (And Why You Should Care) 

Posted by Patrick Ivy | Mar 10, 2021 | 0 Comments

Regardless of whether you operate your business as a sole practitioner or a large corporation, running a business means taking on risks. Risks can come in many forms, so it is important to work with a transactional attorney to help you identify those areas of risk and find ways to prevent or mitigate them. Our experienced business attorneys at Newburn Law have years of experience working with our clients on risk management.  Indemnification is one of many ways to do that. Call Newburn Law, P.C.  today at 303-847-4987 to schedule a consultation to discuss what indemnification is and how it may impact your business.

What Is Indemnification?

The term “indemnification,” or “indemnity,” in the most general sense means an agreement to hold a party harmless for losses. When one party indemnifies the other, they agree not to hold them liable for damages. Indemnity is generally a contractual obligation, which can be expressed in a contract clause with such language as:

  • “Party A agrees to indemnify and hold harmless Party B for losses or expenses incurred as a result of Transaction.”
  • “Party A shall be liable for any losses or damages related to Business”
  • “Party A shall indemnify, protect, defend and hold harmless Party B and its agents, from and against any and all claims, loss of rents and/or damages, costs, judgments, penalties, expenses and/or liabilities arising out of this contract”

Though indemnification clauses often seem like complex legal jargon, they are a standard way for parties to a contract to allocate the risk of the transaction. Visiting with an attorney at Newburn Law, P.C. can help you better understand indemnification and how it should be incorporated into your contracts.

Types of Indemnification

Indemnification generally arises as part of a contract. Some of the most common places where you might find an indemnity clause include:

Business Contracts

When two parties enter into a transaction, there is usually inherent risk involved. Even with a simple contract for the sale of goods, any number of things can go wrong. What happens if the goods are damaged on the way? What if a product is defective? Operating a business means holding yourself out as a businessperson, which carries serious responsibility and has significant legal consequences. The parties may wish to settle the issue of who will be liable for damages ahead of time, which is where an indemnification clause may come in handy. The indemnity clause determines which party must carry the burden of losses related to the contract.

Insurance Policies

An insurance policy is also a form of indemnity. An insurance policy indemnifies the policyholder against losses or damages covered under the policy. For example, a grocery store may purchase a liability insurance policy to indemnify them against negligence claims. If a shopper slips on a wet spot on a floor and hurts their back, they could sue the grocery store for their damages. By indemnifying the grocery store through an insurance policy, the insurer then agrees to pay for those damages. Though this is a very specific example of indemnification for personal injury, businesses can be held liable for countless types of claims, so for many business owners, liability insurance is one critical way to indemnify their business.

Waivers

Finally, certain types of businesses may offer services to the public that they may want to seek indemnity for. One way to protect your business from lawsuits is through liability waivers, sometimes referred to as “release forms” or other names. A liability waiver usually contains an indemnity clause where the customer agrees to hold the business harmless for any injuries or other damages resulting from the use of the business's facility. This is usually a prudent option for businesses that offer relatively risky services, such as:

  • Gyms
  • Skating rinks
  • Ski slopes
  • Amusement parks

Liability waivers can protect a business from personal injury lawsuits, but they can also be held unenforceable unless they meet certain criteria. Our experienced business lawyers at Newburn Law can help you ensure that your indemnification clauses and waivers are serving their purpose to protect your business.

Articles of Incorporation

One of the benefits of incorporating your business is that you are not liable in your individual capacity for losses incurred by the business. This is also a form of indemnification. When incorporating the business, the state of Colorado requires that businesses create their Articles of Incorporation. These Articles of Incorporation should include an indemnification clause that holds harmless the officers, directors, and employees of the corporation against the corporation and its shareholders.

Examples of Unenforceable Indemnity Clauses

Although the exact terms of the indemnity clause will depend specifically on the language in the contract, generally, indemnity clauses will not indemnify against acts of gross negligence, willful or intentional conduct. For example, if a corporate director commits fraud, his indemnity from liability from the corporation will typically be waived because of the intentional nature of his conduct.

You should be sure that you understand the scope of any indemnity clause you agree to. Contract language that seems minor or insignificant can have major legal consequences on how much risk your business is taking on. For example, if your company is agreeing to indemnify another company (meaning you are agreeing to take on the liability of a transaction), you will want to make sure there is some limit on the types of losses you are willing to cover. For example, be wary of a contract that asks you to indemnify “all losses.” This could open up a lot of risks.

Indemnity clauses may also be held unenforceable for other reasons. Some states forbid indemnity clauses that require a party to indemnify another against punitive damages. The policy reason for this is that the party would then be agreeing to compensate another party for actions that are found to be willful, malicious, or intentional. The enforceability of indemnity clauses varies from state to state, so be sure to consult with an experienced business lawyer to ensure your indemnity clauses will be effective when put to the test.

Talk to a Business Attorney Regarding Indemnification

At Newburn Law, P.C., we care about protecting your business. We know for many of our clients, their business is their livelihood, and we do not want a poorly drafted contract to expose them to an unnecessary level of risk. Consult with our experienced transactional attorneys about what indemnification is and how your business can benefit. Call us today at 303-847-4987 to set up a consultation with our experienced business lawyers.

About the Author

Patrick Ivy

Patrick is a native of the Texas Hill Country. He attended The University of Texas at Austin, earning his undergraduate degree in finance in 2003 and his law degree in 2007. In the winter of 2010, he relocated to Denver, Colorado. He enjoys spending time with his family and alpine skiing.

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