Indemnity: What it Means, and Why it Could Affect You

Imagine that you are signing a business contract with a vendor or customer or client. At the end of that contract or buried somewhere in the middle, is a provision called “indemnity.” You sign the contract. Little do you know it, but signing that indemnity contract just puts you on the hook for the actions or wrongdoings of the other party.

What Does Indemnity Mean?

Indemnity means that one party agrees to pay any claim, judgment, or money owed, by the other side to the contract, if a claim is made against the other side by a third party.

So, if X indemnifies Y, and Z sues Y, X would pay the damages owed to X.

How and When Indemnity is Used

Why would anybody ask for such a thing, and why would anybody agree to an indemnity clause? It’s because in many cases, parties don’t want to be sued by third parties for things out of their control.

For example, let’s assume that you hire an artist to draw your company’s logo on a billboard. The artist will do it for you—but the artist doesn’t want to be held liable, if you don’t own the logo (that is, if you didn’t actually own the logo and were infringing on someone else’s rights to that logo).

So, the artist would tell you that he or she will do your artwork—but only if you agree to indemnify the artist in case anybody comes along and claims that the artist is infringing on their intellectual property.

This makes sense–the artist has no control over, and no way of knowing, whether you actually own the artwork or not–why should that artist be sued if you claim you own a logo you don’t own?

As you can see, indemnity provides security to contractors

or vendors, allowing them to do the work you need, without worry of being sued.

Problems and Questions

But indemnity can also cause problems, because you are agreeing to pay a claim that may be owed by the other side of the contract (your contractor or vendor). Indemnity also raises other questions, such as if you are indemnifying the other side from third party claims, are you also:

• Paying for, and directing the legal defense of the claim (including choosing the layer who may handle any claim)
• Making the choice to settle the case or claim, or not settle it
• Indemnifying for claims that may be brought by government agencies or entities (such as regulatory fines brought by the government)

Types of Indemnity

There can even be different kinds of indemnity.

Sometimes, you are agreeing to indemnify another party for any and all claims brought against that party, no matter what.

But other indemnity clauses are more limited. Sometimes, you may agree to indemnify the other side to your contract only if you actually did something wrong—not if your vendor or contractor does something wrong.

Make sure you know what you are signing.  Call the West Palm Beach business litigation lawyers at Pike & Lustig today to review your business contracts and agreements.

Sources:

lexology.com/library/detail.aspx?g=db38e8d6-7451-49e1-9e74-531bf32e0d10

nolo.com/legal-encyclopedia/indemnification-provisions-contracts.html