Types of Indemnity Contract: Everything You Need to Know
The types of indemnity contract include protection or security from a financial liability.3 min read
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.
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
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.
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.
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.
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