Key Takeaways

  • An indemnity agreement shifts financial responsibility for losses or damages from one party to another.
  • Indemnity applies in business, personal contracts, government agreements, and insurance contexts.
  • Common types include broad, intermediate, and comparative form indemnities, each allocating liability differently.
  • Additional forms include limited indemnity, express indemnity, implied indemnity, and statutory indemnity, which provide varied levels of protection.
  • Indemnity clauses must be carefully drafted to define scope, duration, exclusions, and limits of liability.
  • These agreements are widely used in construction, leases, employment, mergers, insurance, and board of directors’ contracts.
  • Courts often scrutinize indemnity agreements, especially clauses attempting to cover negligence or misconduct.

The types of indemnity contract include protection or security from a financial liability. An indemnity contract usually includes a contractual agreement between two parties where one party agrees to cover any losses or damages suffered by the other party. These contracts preclude board directors and company executives from personal liability, should the company be sued or suffer damages.

What Is the Importance of Indemnity?

Indemnity is common in agreements between individuals and businesses. But it also applies to businesses and governments as well as governments in different countries. Indemnity offers financial protection to cover costs that result from accidents, negligence, mistakes, or circumstances that could not be avoided.

Indemnity insurance provides protection against claims or lawsuits. It protects the policyholder from having to pay the full amount of a settlement, even if he or she is at fault. Most businesses require their directors and executives to have indemnity because lawsuits are so prevalent. It ensures court costs, lawyer's fees, and potential settlements are all covered.

Common Uses of Indemnity Agreements

Indemnity agreements are used across a wide range of industries and contract types. They are particularly common in:

  • Construction contracts, where subcontractors often indemnify general contractors or property owners for jobsite risks.
  • Real estate leases, where tenants may indemnify landlords for property damage or third-party claims.
  • Mergers and acquisitions, where sellers may indemnify buyers against unknown liabilities.
  • Employment and board agreements, protecting executives and directors from personal liability.
  • Insurance contracts, where indemnity is the foundation for coverage.

By allocating risks clearly, these agreements provide certainty for both parties and reduce potential disputes.

A Contract of Indemnity

A contract of indemnity, or hold harmless clause, establishes a method for transferring financial risk to a third party with a written contract. It lists all parties involved, the situations covered, and the party or parties that will shoulder the risk.

Essentially, a company that indemnifies another company accepts liability related to a specific product or service. Indemnity clauses are common in:

  • commercial contracts
  • legal contracts
  • loan agreements
  • supply agreements
  • licensing agreements
  • leases

These clauses place the legal responsibility for risk onto a specific person or company. In some instances, an indemnity clause can create more than its fair share of risk, increasing the degree of risk a company will accept.

For example, a supplier may agree to assume all liability connected to a particular product, even if the retailer is actually responsible for the damaged product.

Meanwhile, other indemnity clauses will only take on a specified degree of risk, accounting for unforeseen accidents. Even still, other clauses may only protect against accidents caused by the indemnifying party that's shouldering the risk.

Elements of a Strong Indemnity Agreement

A well-drafted indemnity agreement should specify:

  1. Scope of coverage – What types of claims, damages, or losses are included.
  2. Duration – How long the indemnity obligation lasts.
  3. Exclusions – What liabilities are not covered (such as gross negligence or intentional misconduct).
  4. Defense obligations – Whether the indemnitor must provide legal defense in addition to reimbursement.
  5. Limitations of liability – Caps on damages or exclusions for indirect or consequential damages.

Clear drafting ensures the indemnity clause is enforceable and protects against unintended broad liability.

Broad Form Indemnity

There are three types of indemnity clauses. First, you have a broad form indemnity. This type of clause makes the Indemnitor responsible for his or her own negligence, as well as any negligence from a third-party. This could make them liable for the indemnitee's negligence. In certain states, including California, the indemnitee cannot transfer damages caused by their own negligence or the willful misconduct of the Indemnitor.

If an employee who is injured on the job sues their employers for additional pay on top of their workers' compensation benefits, they'd be barred from suing the employer if they're already receiving workers' compensation. This means they'd have to sue the owner and allege 100% negligence from the employer.

The business owner is going to argue that they were not 100% at fault and pass the claim back to the employee. But, since the employee is alleging that the owner was entirely at fault, broad form indemnity is required to respond to the owner.

Limited Form Indemnity

In some cases, parties use limited form indemnity clauses, where the indemnitor agrees to cover only the damages that it directly caused. Unlike broad or intermediate indemnity, this clause does not extend to covering another party’s negligence. Limited indemnity is considered the fairest allocation of responsibility and is enforceable in most states.

Intermediate Form Indemnity

Next, you have intermediate form indemnity. This indemnifies a party for its negligence unless they were completely at fault. This type of indemnity almost always includes the phrase, " ... caused in part." Since the word "whole" is not included, it is no longer broad form indemnity. Here, partial negligence of the party in search of indemnity is being covered.

Immediate form is the preferred method in the construction industry. It makes the owner harmless from any claims caused by the negligence of the owner. Basically, it sets up all-or-nothing indemnification.

Comparative Form Clause

The third type of indemnity is the comparative form clause. It requires the negligence to be compared. With this clause, the Indemnitor will be held responsible for any losses caused by their proper actions. Common law principals typically recognized in the United States determine this responsibility. The Indemnitor isn't liable for negligence directly committed by the indemnitee.

The conditions outlined in a business contract will determine how much indemnity one party will have to shoulder on behalf of the other. A proper contract will indicate the types of indemnity necessary based on the nature of the transaction.

Express, Implied, and Statutory Indemnity

Beyond negotiated contract clauses, indemnity may also arise in other legal contexts:

  • Express indemnity – Clearly written into a contract, leaving little room for interpretation.
  • Implied indemnity – Arises through the relationship between parties, even without a written agreement. For example, courts may imply indemnity where fairness requires one party to bear responsibility.
  • Statutory indemnity – Imposed by law, such as workers’ compensation statutes or corporate laws requiring companies to indemnify directors.

These additional categories highlight that indemnity is not only contractual but also rooted in equity and statutory frameworks.

Frequently Asked Questions

  1. What is the purpose of an indemnity agreement?
    It shifts financial responsibility for losses or damages from one party to another, offering protection against lawsuits, accidents, or contractual risks.
  2. What are the main types of indemnity clauses?
    Broad, intermediate, comparative, and limited indemnities are most common, along with express, implied, and statutory indemnity obligations.
  3. Is an indemnity agreement the same as insurance?
    Not exactly. Insurance policies are a form of indemnity, but contractual indemnity can also exist outside insurance, such as in leases or employment contracts.
  4. Can indemnity agreements cover negligence?
    Yes, but courts may restrict indemnity clauses that attempt to cover a party’s own negligence or misconduct, depending on state law.
  5. What should be included in an indemnity agreement?
    Clear language on scope, duration, exclusions, defense obligations, and liability limits ensures fairness and enforceability.

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