Understanding Contract Terms (post 2): Indemnification
Last week we started a new contracts series where we explore common terms you see in various contracts and break them down so you can understand exactly what the term means, and its role in your contract. Today’s post will look into the definition of indemnification.
Webster’s Dictionary defines indemnification as “the action of indemnifying” or “the condition of being indemnified,” which is far from helpful. To indemnify is to “secure against hurt, loss, or damage.” Now we’re getting somewhere.
In simple terms, a typical indemnification clause allows you to seek reimbursement for money that you are forced to pay to a third party as a result of injuries or property loss caused by another person’s actions. For example, let’s say that one of your contractors forgets to put away a ladder and a third party pedestrian is injured by the ladder when it falls. The third party sues you because the injury occurred on your property. However, with an indemnification clause that holds you harmless for the contractor’s actions, you can seek reimbursement for any money you have to pay to the injured party.
These clauses are most common in service contracts, and can be particularly important where the other party’s employees or representatives are performing the work. You want to avoid being held liable for the actions of the employees if something goes wrong.
In terms of negotiating a contract, this can be one of the most edited portions of the contract, since each side is trying to minimize their risks as much as possible. The scope and extent of indemnification clauses is the focus of many lawsuits. Because of the significant financial risks involved, you’ll want to be explicit in the terms of the indemnification clause in your contract. The last thing you want is to have to argue an ambiguous indemnification clause in front of a judge when you’re seeking reimbursement.
If you’d like to learn more about drafting an indemnification clause for your business, please feel free to contact us today.