Indemnification is an increasingly used legal term that has brought both trepidation and confusion to business owners. Rightly so, indemnification is an extremely powerful concept that can effectively shift risk—in other words, shift liability—from one party to another. Obviously, not just anybody can impose their legal issues onto another party to side-step liability. Instead, indemnification works through carefully-worded clauses that are usually included in larger contractual agreements. It’s strongly encouraged that business owners—whether small, mid-sized, or large—have a complete understanding of indemnification provisions before signing any sort of binding contract with another business or 3rd party.
Owners that unknowingly sign contracts with strongly-worded indemnification provisions, may in-fact be agreeing to take responsibility for all types of legal claims (and truthfully, signing-over liability is not a matter to take lightly). Liability claims—especially those that involve serious injury or medical care—can cost tens- or hundreds-of-thousands of dollars for the legally liable party; enough to put a company out of business essentially overnight.
Indemnification Provisions Defined
If you were to look-up the word indemnification in a dictionary, you’d see multiple definitions. Historically, the word was used synonymously with “compensation” or “reimbursement”. More recently however, indemnification has been used to describe the transfer of responsibility from one potentially at-fault party to another.
In terms of business ownership, indemnification provisions are commonly included in contractual agreements between businesses and other businesses, businesses and 3rd party contractors, or even between businesses and their customers. Essentially, they specify who is at-fault in the event of an accident.
As a quick example, say that a business owner required a complete office renovation, and contracted the work to a local construction company. Before signing the contract, the business owner may want to include an indemnification provision stating that any lawsuits resulting from faulty building structures are the responsibility of the construction company, and not the responsibility of the business owner.
This is perfectly legal; however, the contractor can likewise propose an indemnification provision that deems just the opposite: that all injuries resulting from malfunctioning building structures will be the responsibility of the business owner, not the construction company. In reality, indemnification provisions that protect third parties (the construction company in our example) are far more common.
Three Things to Know Before Signing any Agreement
It may seem obvious, but business owners must know of what they are agreeing to before signing any contracts. In an effort to minimize risk, 3rd party entities will write indemnification provisions into contracts to deceive owners into absorbing mass amounts of liability and risk. If you’re not sure whether your agreement includes language on indemnification, always assume that it does. Likewise, consulting an attorney is could be very helpful. A qualified attorney that is well-versed in business law will be able to read through the agreement and disentangle which party is liable under which circumstances.
As a business owner, here are three points to know about indemnification provisions before signing a contractual agreement:
1. Indemnification Clauses are Usually Buried in Larger Contracts
Indemnification agreements can, in-fact, be stand-alone documents (in which case it’s relatively easy to identify the provisions that shift liability). The majority of times however, these clauses are inconspicuously buried within larger contractual agreements. “Burying” these clauses is no coincidence; many third parties purposefully try to conceal these terms, and thus have individuals unknowingly sign an agreement that legally binds them to mass amounts of responsibility. Frighteningly, a 100-page contract may contain only 1-2 paragraphs on indemnification provisions. But if the provisions are strongly-written, they can effectively shift all responsibility onto the signee.
2. Know the Language of Indemnification
Perhaps the most important thing to know is the language and terminology of indemnification provisions. As stated above, only a few paragraphs—and really, only a few key words and phrases—have incredible power in terms of defining and shifting liability. Here are a few phrases to bewear of:
- …to hold harmless
- …to secure against loss or damage
- …an obligation to defend
It’s imperative to look for these key-phrases when reviewing your agreement, as any one of them may hold you partially or completely responsible for a wide-range of claims. To a non-professional, this type of phrasing is often-times like another language. An attorney will be of great assistance in identifying the legal jargon of indemnification.
3. Understand Scope and Specificity
Before signing an agreement with indemnification provisions, it’s important to understand exactly who is responsible, their extent of liability, and under which circumstances they will be held accountable. Again, a business law representative will be helpful in deciphering the language of the agreement and answering these questions.
The Bottom Line
When signing a contractual agreement with a 3rd party, understand the power of indemnification provisions. Other parties will always try to minimize their legal risk by shifting liability onto you. Don’t be vulnerable; contact an attorney with a background in business law to review the agreement before signing.
These provisions are often-times carefully worded and inconspicuously embedded into larger contracts. Identifying and understanding the terms of these provisions will help avoid time-consuming liability claims and expensive legal fees.