Indemnification Tips

This was written by Charles “Reb” Gregg in September, 2006. Mr. Gregg provides some invaluable information regarding indemnification agreements. Mr. Gregg is a practicing attorney in Houston, Texas specializing in adventure law and may be reached at 800 Bering Drive, Suite 100, Houston, Texas 77057.

255540856_4e3e1f676cAn indemnification is an agreement between two parties that addresses the possibility of a claim against one of them by a third party.

The party granting the indemnity (the “indemnitor”) promises the person indemnified (the “indemnitee”) that it, the indemnitor, will protect the indemnitee from a described category of claims brought by third persons.

The indemnity obligation frequently is included in a promise to release or waive certain claims.  The combined undertaking may read as follows: “A agrees to release, indemnify and hold harmless, B from any claims arising out of . . .  (there follows some description of the activity, event or transaction which is contemplated).”

An indemnity is not a release, and combining the two in a single promise may create confusion.  The release is a promise by a party not to sue another for a loss that may be suffered by the other in the future.  The indemnity, again, is an agreement to protect another from claims that may be asserted against that person by some third party.

Protection in both areas will be maximized by presenting them as independent and clearly articulated obligations.

The claims to be protected against by a promise of indemnity may include:

a)  Claims arising from the conduct of the indemnitor (for example, the indemnitor causes a loss to a third-party who asserts a claim against the indemnitee); and

b)  Claims arising indirectly from losses suffered by the indemnitor (family members, for example, may have claims of their own for losses suffered by an indemnitor).

Indemnities may arise in a variety of transactions, including the following:

a)  A program performing a service for a client may ask the client to indemnify the program for claims of a certain nature arising from the client’s participation in the program.  A very broad – perhaps too broad – articulation of this indemnity might be the following: “Client agrees to indemnify, protect and hold harmless the program from any and all claims which arise from client’s participation in the activities of the program”.  It can be argued, reasonably, that the term “which arise from” is too broad and too vague to identify the type of act or omission which might trigger the indemnity.  Would an accident which would not have occurred but for the mere presence of the client, for example, trigger an indemnity?  Consider the alternative: crafting this indemnity obligation to require acts or omissions, or conduct, or wrongful conduct, on the part of a client;

b) A program contracting for certain services may seek an indemnity from the contractor, protecting the program from claims that “arise from” the contractor’s performance of its services.  Again the scope of the event or events which trigger the indemnity will be important.  Any conduct of the contractor?  The wrongful conduct of the contractor?  Any event which occurs while the subcontractor is in control of the activity?  In contractor situations, representatives of the program often are participating in some leadership role.  Whether or not this participation extends into the event contracted for, if an indemnification is to be enforceable, tasks and responsibilities must be allocated so that the indemnification obligation can track the respective areas of responsibility.  In other words, the indemnity obligation of the contractor should arise from occurrences which the contractor has the authority, power and the responsibility to manage, control and supervise;

c) In the challenge course industry, for example, a builder of a course may seek indemnification from the owner of the site against claims that arise out of the future use of the course.  Conceivably such an indemnity could include all claims arising from use of the course.  More often, the indemnity extends to claims arising from the use of the course unless they arise (in whole or in part?  solely?) from a defect in the performance of the builder.  Correspondingly, the site owner or operator may require an indemnity from the builder for any claim, including of a user of the course, arising from a defect in the construction.

Common law, perhaps even statutory law, of some states allows indemnities as a matter of law.  If one party is sued for a loss to which another party contributed, the party sued may bring the “contributing” party into the suit as a cross-defendant.  Ideally, then, all persons who might have contributed to the loss allegedly suffered by the party who brings the suit, will be before the Court and the matter can be resolved in full. State law may allow a person who already has paid damages (that is, the suit has ended) to sue for indemnity from another party who contributed to the original claimant’s loss.

The requirements of a contractual indemnity (one agreed to by the parties) may vary.  It may require the indemnitor  to pay a judgment, or to step into the dispute when the claim is filed, and provide protection thereafter.  This latter strategy allows the indemnified party to escape the expense and trouble of dealing with the claim and defending the lawsuit.

Contracts of indemnity obligate the indemnitor financially, and that obligation may not be covered by the liability insurance policy of the indemnitor unless the insurance company specifically agrees to protect (indemnify, in fact) the indemnitor in the event the indemnitee does make a claim.

An indemnification from a party, standing alone, is only worth the ability of the indemnifying party to perform on its promise.  Therefore, often an obligation to indemnify is coupled with an obligation to add the indemnified party as an additional insured on a policy held by the indemnitor.  (The issue of “additional insured” is quite complex and will not be covered here).

Other issues involving indemnities include the choice of counsel that will defend the claim; crafting an indemnity obligation so that the obligation of the indemnitor is insurable; and being prepared for mutuality of indemnity obligations, which would extend to scope, choice of counsel, security, etc.

Indemnities can become exceedingly complex, and as indicated above, agreements of indemnity present many opportunities for expanding and reducing exposure.  You should consult with competent legal counsel if you wish to impose an indemnity obligation on another, or if you are asked to indemnify.

Photo Credit:  Mark van der Chijs (wp-content/uploads/2010/02/255540856_4e3e1f676c.jpg)