An indemnity agreement is a contract between two parties in which one party agrees to reimburse the other for any losses or damages that may occur as a result of their actions. The agreement may also include provisions for reimbursement of legal fees and costs incurred in defending against any claims or class action suits. Most organizations use indemnity agreements to protect board directors from personal liability in case of financial or legal issues. No matter the context, indemnity agreements are an important part of doing business and should be taken seriously.
If you are considering entering into an indemnity agreement, make sure you understand the terms of the agreement and any potential ramifications. Additionally, it’s important to consult with a lawyer to ensure that the agreement is legally binding and provides the necessary protections.
How to Write an Indemnity Agreement-
An indemnity agreement has two parties:
*Indemnitor: The party that holds another harmless in a contract.
*Indemnitee: The party that is protected by the indemnitor against liabilities.
Use the following 7 steps to write an effective and legally binding indemnity agreement-
1. Consider the Indemnity Laws in Your Area
Indemnity laws define how much risk can be transferred between parties in a contract. You should consider this when identifying the state statutes to govern your indemnity agreement.
Indemnity laws vary by state. For example, in some states, a clause in an indemnity agreement may be considered void if it fails to meet certain requirements. Some states even have anti-indemnity statutes.
Taking the time to consider the relevant indemnity laws in your area ensures your indemnity agreement is properly structured and offers adequate protection to both parties.
2. Draft the Indemnification Clause
The indemnification clause is the heart of an indemnity agreement. In this clause, you state the liabilities the indemnitee will be protected against. Ensure the wording is precise and only open to one interpretation (unambiguous), especially if your organization is the protected party in the agreement. Ambiguity in a contract is usually resolved in favor of the indemnitor.
The clause should outline that the indemnifying party agrees to defend and hold the indemnitee harmless in particular circumstances.
3. Outline the Indemnification Period and Scope of Coverage
Outlining the indemnification period and scope of coverage is an essential part of this process. The indemnification period is the duration in which the agreement will protect the indemnitee from claims and legal actions. This period can be defined as a specific length of time, such as five years, or it can be indefinite. Again, it’s important to be specific in your definition of the indemnification period.
4. State the Indemnification Exceptions
This section specifies conditions under which the indemnitor will not protect the indemnitee. These conditions vary depending on the agreement’s nature. However, most indemnity agreements outline that the indemnitee will not be indemnified if:
*The party knowingly commits a crime.
*The indemnitee acts unreasonably or in bad faith.
*The indemnified benefited from the risk that occurred.
*The indemnitee gets fully compensated by other legal means.
5. Specify How the Indemnitee Notifies the Indemnitor About Claims
An indemnity agreement should reveal how the indemnitee will notify the indemnitor of a dispute or claim covered under the legal document. That way, the indemnified party won’t be in the dark when facing losses, damages, or legal issues. You should also outline how the indemnitor defends the indemnified party against the claims, ensuring the agreement is comprehensive.
6. Write the Settlement and Consent Clause
This clause outlines how both parties in an indemnity agreement must get each other’s consent before settling a claim covered in the contract. The clause ensures the indemnitor doesn’t settle allegations in a way that imposes a penalty or limitation on the indemnified without written consent. It also ensures neither party unreasonably delays consent to the proposed settlement.
7. Outline How to Enforce the Agreement
It’s important to make sure that the agreement is enforceable in case something goes wrong. Therefore, the indemnity agreement should include a specific process for handling disputes and resolving disagreements. This process should be clear and easy to understand, so both parties know what to expect when issues arise.
Conclusion
The indemnity clause is one of the most essential clauses in any type of contract and it goes through many rounds of negotiation. This clause determines the risks and rights of both the parties i.e., the indemnifier and the indemnity holder. There can be serious consequences to a poorly negotiated/drafted indemnity clause and ambiguities should be removed. The sole reason is that the indemnity clause shifts the loss from one party to the other party. The above-discussed points should be kept in mind while drafting an indemnity clause to measure the coverage of losses.