Third Party Indemnification: Everything You Need to Know
Third party indemnification refers to a clause in the contract between a company working in health care or safety industries and a customer.3 min read
Third party indemnification refers to a clause in the contract between a company working in health care or safety industries and a customer, specifying the compensation the customer is due in case of third-party losses.
Defining Third Party Indemnification Clauses
A safety alarm company has a hard time evaluating third-party risks and potential losses because it has no way of knowing exactly how many people go in and out of the protected property, the valuables they carry, or the reason they are there. In other words, the company has no way of knowing if it is prepared for any risks brought by third parties.
An unfortunate event, such as a burglary, fire, or theft, is not caused by the security company or its equipment. The people in control of everyday operations at the premises are in a much better situation to evaluate and prevent any such events, while the security alarm company can only act retroactively.
For those reasons, security alarm companies set prices without taking into consideration any third-party losses that may occur. The responsibility is passed to the property managers, who are in a much better position to prevent such events.
Third Party Indemnification Contract
The first part of a contract that aims to define third party indemnifications is clearly defining the used terms. The roles of the indemnitor and the indemnitee must be clearly defined from the beginning to avoid any potential confusion.
The second part refers to general concepts that form the basis of the relationship between all the parties involved:
- The first of these concepts is an admission from the two parties involved that their actions may have effects on third parties. However, a company that provides a service is only responsible for any risks that the customer may face, not any indirect occurrences that affect other parties.
- An agreement between suppliers and customers should not benefit anyone else unless clearly specified from the beginning.
- Customers should not fully rely on suppliers to alleviate risks. Instead, they are expected to do the best they can to avoid liabilities. It is not the supplier's responsibility to resolve claims by end consumers; that responsibility falls on the customers.
- The contract doesn't specify only the terms in case of an eventual dispute between the two parties involved. It also serves as a framework for the situation when the two parties work together to defend against claims made by a third party.
- The indemnifying party is responsible only for their actions and should not be held accountable for liabilities caused by other parties.
The third part of the contract refers to the principles of collaboration between the two main parties:
- The range of obligations for indemnification clearly defines what may constitute as a third-party claim. They usually include any damage to humans or possessions, data losses, triggered fines, or government penalties. Suppliers should be clearly indemnified for any third-party losses, except for situations where their acts or negligence contributed to the extent of the loss.
- The full extent of any potential liability should clearly be outlined and any claims by third parties should be considered direct damages.
- The relationship between indemnitor and indemnitee should be outlined, so in case an obligation to indemnify a third party occurs, everyone involved knows their rights and obligations, as well as the conditions for any mutual defense against the claims formulated by the third party.
Indemnification in Commercial Contracts
It is usually expected that, in a professional relationship between two parties, any liability that should fall on any of the parties would be due to their own wrongdoing. However, the language used in indemnification clauses in commercial contracts is often vague enough to produce disputes in case of a claim by a third party.
In some cases, although both parties are obviously responsible for damages incurred to a third party, the wording in the initial contract is vague enough for one party to try and place all blame on the other. For that reason, the language used in the contract must be as specific as possible, covering most, if not all, potential situations that may occur.
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