Key Takeaways

  • A consultant indemnification clause protects clients from liabilities resulting from a consultant’s work.
  • These clauses often shift significant legal and financial risks to the consultant.
  • Consultants should negotiate clause scope, carveouts, and definitions of negligence or misconduct.
  • Professional liability insurance may not fully cover indemnification obligations.
  • Mutual indemnification and limitations of liability can provide fairer terms.
  • Legal counsel can help draft, interpret, or negotiate indemnity language effectively.

A consulting agreement indemnification clause is an important concept to be aware of if you own a business and find yourself entering into a contract with a consultant. In fact, most large companies require an indemnification clause in the consulting contract to ensure that it will be protected from liability in the event of a legal suit due to insufficiencies in the consultant’s work or potential legal issues arising from the work conducted by the consultant.

Consulting Agreement Indemnification

Specifically, a consultant agreement is one between a company and a professional consultant. The company in this type of agreement is considered the client and the consultant is the professional vendor providing specific services for the client, whether it be in the form of professional advice or work being done for the business. Most consulting agreements, if not all, require an indemnification clause, which is usually requested by the business.

Indemnification clauses are standard for large businesses, as they will likely not enter into contracts with consultants or consulting companies unless an indemnification clause is present in the agreement. Indemnification in this area means that the consultant promises to indemnify the client, or protect it, if the client finds itself on the other end of a lawsuit due to the work done by the consultant.

And since the consultant has complete control over the consulting work that is done, it is only fair that the consulting professional or consulting business indemnify the business for any issues arising out of that particular work. 

Types of Indemnification Clauses in Consulting Agreements

Indemnification clauses in consulting agreements typically fall into three categories:

  1. Broad Form Indemnity:
    The consultant agrees to indemnify the client for all claims, including those arising from the client’s own negligence. This form is the most client-favorable and often contested.
  2. Intermediate Form Indemnity:
    The consultant covers liabilities arising from both parties’ joint negligence but not the sole negligence of the client.
  3. Limited or Comparative Form Indemnity:
    The consultant is only liable for claims arising directly from their own negligence or misconduct. This is generally seen as a more balanced approach.

Understanding which form applies is critical, as it directly impacts the financial and legal exposure of both parties.

Is it Covered by Insurance?

These types of liabilities might not be covered under insurance, which is why the indemnification clause is almost necessary. Furthermore, some clauses require that the consultant provide a defense for certain claims that might be brought against the business. This might mean that the consultant is financially responsible for finding a defense attorney to work on behalf of the company, along with paying any and all expenses incurred during the legal suit.

Most liability insurance policies don’t provide such coverage for the defense of another party. This is different from contractor’ general liability coverage, which will cover defense fees for bodily injury, death, or property damage. Therefore, the consultant is taking a big risk when signing the contract by providing that it will protect the company if a legal suit arises; this might be significantly costly for the consultant.

Negotiating Consultant Indemnification Clauses

Consultants can protect themselves by negotiating clearer and narrower indemnification terms. Common negotiation strategies include:

  • Defining Scope of Liability: Limit indemnification to direct damages, excluding consequential or punitive damages.
  • Carveouts for Client Actions: Clarify that the consultant won’t be liable for issues arising from client-provided information or instructions.
  • Limitation of Liability Clauses: Cap the indemnification amount to the fees paid or insured amounts.
  • Mutual Indemnity: Propose a reciprocal clause where the client also indemnifies the consultant for certain liabilities.

Such modifications can help ensure the clause is fair, especially in contracts involving design professionals, IT consultants, or legal advisors.

Unfairness in Indemnification Clauses

There have often been questions regarding unfairness with such indemnification, particularly because the consultant is taking on great risk in this area. For example, architects and engineering firms are usually forced into signing agreements that make them assume the risk, even though they have no control over the risks.

Since indemnity clauses can be so complex and risky, it is beneficial to have an attorney assist when drafting such language. Be sure to fully understand the language before signing the contract. If you are engaging in consulting work for a large business, the company might include overly ambiguous language throughout the contract, including the indemnification section. If you have any uncertainties regarding the clause, ask questions and have your attorney review it before you do anything else.

Key Elements to Review in an Indemnity Clause

Consultants should carefully review the following elements in any indemnification clause:

  • Triggering Events: Clearly identify what events will trigger the indemnification (e.g., breach of contract, third-party claims, negligence).
  • Covered Parties: Specify whether indemnity extends to employees, subcontractors, or affiliates.
  • Defense Obligations: Determine if the consultant is required to defend the client and pay legal costs up front.
  • Claim Process: Outline how claims are reported and resolved, including notice requirements and settlement authority.
  • Duration of Liability: Confirm how long indemnification obligations last after the agreement ends.

Consultants should avoid vague language, such as “any and all claims,” which could expand liability beyond reasonable bounds.

When Indemnification Isn’t Present

If you are a business owner entering into a consultant agreement with a professional consult, and he chooses not to sign the contract due to the indemnification clause, you now must make a determination as to whether or not you will enter into the contract. You have three options:

  • You can accept it and remove that portion in the contract
  • You can refuse to enter into the agreement
  • You can alter the indemnification clause

Keep in mind that if you choose to remove the indemnification clause, you are now putting the risk on your business. The hope is that no issues will ever arise which would require your business to take on the financial burden of litigating a suit. But if this does in fact occur, then you can’t place any blame on the consultant, since the contract didn’t have any type of indemnification clause present.

Another alternative is to alter the indemnification clause. You can sit down with the consulting professional and negotiate on the terms and language that will be included in the indemnification clause.

Sample Consultant Indemnification Clause

Here's a sample clause to illustrate how a consultant indemnification provision might be worded:

"Consultant shall indemnify, defend, and hold harmless the Client, its affiliates, and their respective officers, directors, and employees from and against any and all claims, damages, liabilities, and expenses (including reasonable attorneys' fees) arising out of or related to Consultant’s breach of this Agreement or negligence in the performance of services."

While clauses like this are common, they should always be customized to fit the particular scope and risk profile of each engagement. Language should be reviewed with legal counsel to ensure clarity and enforceability.

Frequently Asked Questions

  1. What is a consultant indemnification clause?
    It’s a contractual provision where the consultant agrees to compensate the client for losses or legal claims resulting from the consultant’s services.
  2. Can consultants limit their indemnification obligations?
    Yes. Consultants can negotiate to limit indemnity to their own negligence, cap liability, or exclude indirect damages.
  3. Is indemnification the same as insurance?
    No. Insurance may help fund indemnity obligations, but indemnification is a contractual duty, while insurance is a separate risk-transfer mechanism.
  4. Should indemnification be mutual?
    In some cases, yes. Mutual indemnification clauses help ensure that both parties are protected from the other’s misconduct.
  5. Do courts enforce all indemnification clauses?
    Not always. Courts may strike down overly broad clauses or those that attempt to indemnify against a party’s own gross negligence or willful misconduct.

If you need help learning more about a consulting agreement indemnification clause, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.