Indemnity Agreement

Illustrative image of hand coming out from sea holding model home representing home
Getty Images/Fanatic Studio

To explain an indemnity agreement, it is first necessary to define the term "indemnity." Indemnity is defined as "a duty to make good any loss, damage, or liability incurred by another (Black's Law Dictionary). Indemnity has the general meaning of "hold harmless;" that is, one party holds the other harmless for some loss or damage. Some variations of meaning for therm "indemnity:"

  • Indemnity can also refer to compensation for loss or damage from the actions of another party
  • And indemnity can also be described as a legal exemption from loss or damages, as in the case of an indemnity clause in a contract.

What Type of Business Would Use an Indemnity Agreement?

The most common case of a business that has indemnity agreements is in construction. But any business with employees may want those employees to sign an indemnity agreement to protect against employee lawsuits.

Rental car companies also use indemnity agreements to protect against lawsuits from accidents involving rental car drivers.

Indemnity Agreements and Dangerous Activities

Businesses that offer somewhat dangerous activities to the public (skiing, para-sailing, amusement park rides) require that the members of the public sign an indemnity agreement releasing the business from liability in case of an accident. In reality, if the business is found to be negligent (faulty equipment, poor maintenance), the individual who was injured still has a claim against the company.

An indemnity agreement (sometimes called a "hold harmless agreement" can be a contract or a section of a contract. In these cases, an indemnity agreement is contract language that indemnifies (holds harmless) one of the parties in a contract for specific actions that might cause damage to the other party.

Examples of Indemnity Agreements

  • A kennel may want an indemnity agreement in a contract with a pet owner to keep the kennel from being sued for damage caused by the owner's pet to other pets. I this case, the pet owner is being asked to indemnify the kennel owner (to hold the kennel owner harmless) for damages caused by the pet.
  • Indemnity clauses are often found in intellectual property licensing agreements.
  • In another general example, a landlord may require a tenant to sign a "hold harmless" clause in a rental agreement, agreeing that the landlord is not responsible for damages caused by the tenant's negligence.

In each of these cases and many others, Party A must be persuaded to sign a contract which could cause him or her to be sued. So, Party B is being required to indemnify Party A, so the contract can be signed.

Types of Indemnity Agreements

Indemnity agreements are found commonly in construction contracts. In this context, there are several types:

  • Broad form indemnity agreements, ​also called "no fault" agreements, have been common in construction contracts where all loss is placed on the sub-contractors. Many states have declared this type of indemnity agreement to be illegal.
  • Limited indemnity agreements state that the subcontractor pays for all damages caused by the subcontractor's own negligence. This type of indemnity agreement still places a heavy burden on the subcontractor.
  • Comparative form agreements or clauses are based on the common law principle that negligence is based on actions over which the actor has complete control.

Typical Parts of an Indemnity Agreement

The specific form of an indemnity agreement varies by state law. This is a general overview of what you might find in an indemnity agreement.

The two parties will be described: 

  • The Indemnitee - the person wanting protection
  • The Indemnifier - the person promising (warranting) to minimize harm to the indemnitee

The agreement may describe consideration (usually a sum of money) that will be used to secure the agreement. 

The agreement will state the specific terms under which the indemnitee will be held harmless. This is fairly complicated legal language. 

Exclusions to the agreement will be described. One common exclusion is negligence or fault of the indemnitee.

That is, if the indemnitee can be shown to be negligent, the indemnification doesn't work (the indemnitee is at fault and can be sued). 

A claims process will described, including when a claim must be filed and the limits to the claim. 

The agreement wills state who has the burden of proof; usually the indemnifier must prove that the claim is not appropriate. 

These are the main parts to an indemnification agreement, mostly procedural.