What is indemnification insurance? Indemnity insurance is a legally enforceable undertaking made by one party to compensate the losses or damages incurred by another.

Indemnity vs. Guarantee

A guarantee is an obligation to pay a certain sum of money if the primary debtor fails to fulfill his obligation. Thus, it is a primary obligation and is enforceable only if the beneficiary has a legal right to sue the party in respect of which the guarantee is given. However, an indemnity is a primary obligation. It is enforceable even if the beneficiary cannot sue the actual person causing the loss. A principal has an obligation to indemnify his agent against the losses sustained by the agent while performing his duties within the scope of the agency.

Indemnity In the Construction Industry

An indemnity agreement is also known as a hold harmless agreement. It's a common way of risk transfer prevalent in the construction industry. Almost every construction agreement includes an indemnity clause wherein one party promises to protect the other against any future claims for damages made by a third party.

In a construction setup, the indemnity is usually in respect of an injury taking place on the construction site that gives rise to a third-party claim. For instance, owners of a property have a legal obligation to ensure a certain level of safety in their premises. Hence, if someone gets injured on a construction site, the site owner is sued for damages.

An indemnity agreement has an effect of transferring the owner's liability to the contractor. The owner or the beneficiary is called indemnitee and the contractor or the promisor is called indemnitor. Since the contractor has the possession and control of the property, he is in a better position to manage the safety of the site and bear the risk.

The Scope of Indemnity Coverage

The Commercial General Liability (CGL) clause sets out the scope of coverage of the indemnity obligation. The coverage is provided by making an exception to the contractual liability exclusion, which usually eliminates the coverage for assumption of liability.

Due to the exception, the exclusion does not apply to an insured contract, which is defined in the policy to include the following types of contracts:

  • Lease of property (excluding an agreement to indemnify fire damages to a rented or occupied property)
  • Sidetrack agreement
  • License or easement (excluding a construction or demolition within a distance of 50 feet from a railroad)
  • A promise to indemnify a municipality (other than for the municipality's work)
  • Elevator maintenance contract

In addition to these contracts, insured contracts also include contracts falling under the following blanket clause:

Any provision in a contract related to your business under which you take over the tort liability (the legal liability without any existing contract) of another party to compensate a third party for any physical injury or property damage.

Forms of Indemnity

Broad Form Indemnity Agreement

Under a broad indemnity clause, the indemnitor undertakes to protect the indemnitee against all liabilities resulting from the contract without any qualification. Thus, even if the loss or damage is sustained due to the sole fault of the insured, the indemnitor will have to indemnify the indemnitee.

Let's say, for instance, a pedestrian falls down and gets injured at a construction site due to the sole fault of the indemnitee, and this results in $100,000 in damages. Now, even if the indemnitee is at fault, the indemnitor will have to compensate the entire damages.

Currently, broad form indemnity agreements are allowed only in a few states.

Intermediate Form Indemnity Agreement

Under an intermediate indemnity clause, the indemnitor undertakes to compensate the indemnitee only if the indemnitor is at fault, at least to some extent. In the above example of the injured pedestrian, let's say that the site owner is at 99 percent fault and only one percent of fault can be attributed to the contractor. Even then, the contractor will have to indemnify the owner for the complete damages of $100,000.

Limited Form Indemnity Agreement

Under a limited indemnity clause, the indemnitor undertakes to compensate the indemnitee only to the extent of loss or damages arising out of the indemnitor's fault. Taking the above example again, let's say that the owner is at 80 percent fault for the pedestrian's injury and the contractor is responsible only for the remaining 20 percent fault. Under a limited form indemnity, the contractor will be liable to indemnify the owner only 20 percent of the damages, i.e., $20,000.

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