Suggestion – don’t bring up indemnification at a dinner party if you’re trying to break the ice. As most lawyers (and non-lawyers who even know what it is) know, it can be more of a conversation ender than a conversation starter. However, it is an important legal concept that parties should be aware of before entering into contractual relationships, and it’s really not as complicated as many people assume.
Here’s a brief and general intro to indemnification.
Why Does Indemnification Exist? Indemnification is a risk allocation tool, allowing the parties to know who will be responsible for what costs or liabilities in certain situations.
What is it? Generally speaking, indemnification is an obligation by one party to compensate the other party or otherwise be responsible for certain costs and expenses. Indemnity is imposed either by law or contract.
What costs are covered by an indemnity? Generally, an indemnification obligation requires the party providing indemnification to compensate the other party for any claims, losses, liabilities, etc. incurred by the other party and owed to a third party.
Are There Limits to Indemnification? The general rule is that certain losses cannot be indemnified – for example, a party cannot be indemnified (i.e. recover from the other contracting party) for losses caused by its own grossly negligent acts or omissions, its own use of the products that does not conform with the specifications or instructions, or its own bad faith failure to comply with the agreement.
Why Is It Important to You? When you are entering into a contract, any reduction of your risk is a good thing. A proper indemnification provision allows you to ensure that if you are sued because of the other party’s acts or omissions, you can recover any costs or damages from the other party rather than be liable for them yourself.
Again, this intro to indemnification is brief and there may be other considerations to take into account in your particular situation. Please contact an attorney if you have further questions or if you have a specific situation that you’re dealing with.
