Clients often want a better understanding of what “indemnification” means in a contract. It shows up in business contracts, leases, construction contracts, and some consumer contracts. Indemnification is both simple and complicated.
At a basic level, when you read that someone is going to “indemnify” someone else in a contract, think “reimburse” or “backstop.” If you and I have a contract where I indemnify you, it means if you get sued by a third party because of something I did, I will reimburse you what that costs you. Put differently, I’ll be your backstop on that claim. Simple, right?
Here’s where it gets more complicated. There are dozens of different ways indemnification provisions can be written. Those differences could help you or hurt you, depending on whether you are the person making the reimbursement (called the “indemnitor”) or the person who receives the reimbursement (called the “indemnitee”). This is why you always want to draft or read an indemnification provision carefully. It’s not standard, trivial boilerplate.
If you are the person receiving the reimbursement, you’d like the indemnification to be as broad as possible and be paid as early as possible. On the other hand, if you are the person having to pay the reimbursement, you’d like it to be as narrow as possible and you’d rather push payment day into the future. Think about these variations:
1. Who gets to receive reimbursement? Is it just the party to the contract, or is it also their officers, shareholders, employees, subsidiaries, and affiliates? The latter can be a really big group you are backstopping.
2. What triggers making the reimbursement? Do I only have to pay you if you prove I breached the contract or just because you say I did? Worse, do I have to reimburse you if you get sued by a third party for any reason, even if it wasn’t my fault? Do I only have to reimburse you if I was the sole cause of what went wrong, or if I was merely partly responsible?
3. What gets reimbursed? Is it only the damages settlement or award you have pay out to the third party? Is it also any fines or penalties? Does it include your attorney’s fees?
4. When does the reimbursement happen? As soon as there is a claim, or after proving your case at trial, or after you’ve appealed the case as far as you can?
5. If I am receiving the reimbursement, I’d like the provision to allow recovering my attorney’s fees if I must sue you to force you to make the reimbursement.
6. Does indemnification run one way (for example, I must indemnify you, but you don’t have to indemnify me) or is it reciprocal (you backstop me, and I backstop you).
Over time, indemnification provisions have expanded from covering expenses from third parties bringing claims to covering what are really damages between the parties to the contract (called first-party indemnification). An example of that in a contract where you are doing work on my property is a provision saying that if you damage my building or vehicles while you are onsite working, you will “indemnify” me for that loss. That really just means you’d be liable or responsible for the damages you cause if you damage my building or my vehicles.
Obviously, you don’t want to mindlessly copy an indemnification provision from someone else’s contract or template. That could end up hurting you badly. You or your attorney will want to tailor the indemnification provision to your role, your risks, and your benefit in the deal.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough. She can be reached at (919) 732-7300 or kim.steffan@steffanlaw.com.