An indemnity clause gives one party an obligation to compensate the other if harm or loss arises from the contract. Indemnity clauses effectively allocate risk between the parties. The danger, however, is when the clause is more extensive than the party thought when they entered into the agreement. We answer four FAQs about the scope of indemnity clauses and how they could affect your business.
1. What is an Indemnity Clause?
Commercial contracts typically include an indemnity clause among other standard terms (also known as boilerplate clauses). Words such as “hold harmless”, “defend”, “make good” or “compensate” often indicate the clause is, in effect, an indemnity clause. The list is by no means exhaustive.
Indemnity clauses often set out a list of what actions a party is insured against, for example:
- All lawsuits, actions or proceedings, demands, damages and liabilities.
- All claims, liabilities, losses, expenses and damages arising from a contract.
- Loss, damage, injury or accidental death from any cause to property or person occasioned or contributed to any of your acts, omissions, neglect or breach or default.
Here is where the scope of the indemnity can be much wider than it needs to be for the purpose of the contract.
2. What is the Extent of an Indemnity Clause?
Indemnity clauses are sometimes reasonable for the contract’s terms or even essential for parties to carry out an agreement. Other types of indemnity clauses are completely unnecessary and could expose a party to liabilities they have no control over. Where an indemnity clause continues long after a contract ends is when a problem can arise – ensure you negotiate the term so as to narrow its scope and duration.
3. How Does an Indemnity Clauses Affect Your Business?
If you are entering into an Agreement and required to provide an indemnity, you should first negotiate its removal entirely. However, if the other party insists on the clause, you should ensure it is narrow, so you are less exposed to risk. For example, you may be able to word it to exclude you from being liable if a loss is the other party’s fault, or you could set a maximum amount that they could claim under the clause.
If you are seeking an indemnity from the other party, for example, asking the other party to indemnify you for any losses you incur as a result of doing something on their behalf, be reasonable. Although it may seem like a good idea to negotiate a broad protection, the other party may require the same of you.
4. How Should Your Insure Yourself Again Indemnities?
An option to consider is obtaining insurance to cover any indemnity you provide. Obtaining insurance in this instance is not to be confused with Professional Indemnity Insurance, which covers you for negligent advice or misrepresentations among other things. For some indemnities, you may be able to get quotes for insurance and, in fact, asking for these may open your eyes to how much risk you are taking on.
If you are asking for an indemnity, remember that much like a guarantee, it’s only as good as the person giving it, so you may wish to insist on the other party obtaining insurance. Insurance may provide an inflated cost of an indemnity, but obtaining a quote can offer perspective on whether it’s necessary to have all those indemnity clauses for the contract to work for both parties.
Before you enter into negotiations about your contract, first identify what is important to you and the risks that can arise. Only ask for indemnities that are necessary and don’t grant any that could be too onerous or expose you to more risk that you are prepared to accept.
A contracts lawyer can help you negotiate with the other side to try to remove or reword indemnity clauses or to make sure they are drafted to achieve their real aims and not expose you to any more risk than necessary. If you have any questions or need assistance drafting, get in touch on 1300 544 755 or fill our the form on this page.