Definition of Indemnification Clause: Everything You Need to Know
The definition of indemnification clause is any clause that shifts blame to another party. 3 min read
Definition of Indemnification Clause
The definition of indemnification clause is any clause that shifts blame to another party. It is a common trait in agreements, and it is one you should read carefully to see if such blame or burdens would fall on you. Further, it is a clause where a single party agrees to take on burdens if a lawsuit takes place. The contract could lay out specified reasons why one party would have to pay damages, and the party that accepts the blame if a judgment is levied against him.
The process of indemnifying a person forces them to take losses that are caused by that person instead of seeking compensation from a party. In addition, this would also force that person to pay another party if a breach occurred or if a party failed to accomplish a task outlined in the agreement. The real significance of such a clause is the protection of the indemnified party against lawsuits from third parties. Despite the absence of a clause, parties can still recover losses and damages.
You should be aware of the following words and phrases when it comes to indemnification:
- Hold harmless
Holding harmless and indemnify have the same meaning, which means to make a situation whole after suffering a loss. Defending pertains to responsibility in defending from lawsuits of any kind, and it is not present in identification provisions if the party chooses to defend their own litigation cases, although the indemnified party may have to provide payment for it.
- Example: You are a software developer and agree to indemnify a client of yours against copyright claims pertaining to a code you write for that person. When that client uses the software, they face a lawsuit from a different company that claims the software in question is like theirs. According to the indemnity clause, you must cover the client’s burden when he defends himself in the lawsuit. Also, you hold responsibility for that client’s damages if they were held liable to that third party.
An indemnification clause relates to warranties or representation, which entail promises that assets or products are presented in a truthful manner.
- Example: In the case of the same software developer, your agreement with that client may have forced you to add a warranty to the software. The warranty may have said that the software was wholly original. The violation of the warranty would allow a client the right to use the identification clause if they faced a lawsuit from the third party for copyright violations.
It’s worth noting that indemnification clauses can be expensive, especially if a warranty is worded in a broad manner, and the clause forces you to pay for all claims regardless of the circumstance.
In addition, the clauses function as an insurance bridge between all parties, shifting liability and risk between one party to another. A different obligation, but one that’s usually included in such a clause, is called defense. This party of a clause not only honors losses, but also protects a person against claims in litigation cases. For instance, such a clause could cover the hiring of a defense lawyer. Moreover, indemnity may be restricted to not only damages from various claim types, but also to various loss amounts.
A common indemnification mandate is to place indemnification against third-party issues, which can be claims ushered in by a person other than parties within the contract. With that, there is a less common trend of certain parties to place indemnity against one another when it comes to claims involving multiple parties. This is also called direct claims, and they are claims where a single party in a contract invokes it against another party. Direct claim is only important in limited cases, and it is usually meant as indemnity in protection against claims pertaining to warranty and representation forged between two parties in an agreement.
- Example: Party A agrees that if party B is found liable in court, Party B is still not liable for providing compensation to party A for damage, losses, and expenses.
A common theme you’ll find in indemnification occurs regarding insurance. This usually occurs when insurance companies, as part of a person’s insurance policy, agrees to place indemnity on an insured person for any losses or damages that a person incurred from accident or injury.
To learn more about a definition of indemnification clause, you can post your job on UpCounsel’s website. UpCounsel’s attorneys will provide more information on contract clauses, including indemnity, and if you’ll be held liable in any contract you sign. Moreover, they will defend your rights in court if blame falls upon you in some fashion.