The Concept of Indemnity in Business Contracts

Indemnity, Indemnification, and Indemnify

Indemnity, Indemnify, Indemnification
The Concept of Indemnity. Michael Blann/Getty Images

What is Indemnity? 

The principles described in the terms "indemnity" and "indemnify" are interrelated so these terms are defined and explained together.

Indemnity is defined as "a duty to make good any loss, damage, or liability incurred by another" (Black's Law Dictionary). The term comes from a  late Middle English word meaning "unhurt, free from loss." 

Indemnify and and Indemnification

To indemnify someone is to absolve that person from responsibility for damage or loss arising from a transaction.

(Black's Law Dictionary). 

Indemnification is the act of not being held liable for or being protected from harm, loss, or damages, by shifting the liability to another party. 

Indemnity - Variations in Meaning 

Indemnity also includes an understanding that an injured party has a right to claim reimbursement or compensation for a loss or damage against the person who has the duty. This concept is seen often in civil lawsuits relating to negligence claims. 

Indemnity refer in some contexts as compensation for loss or damage from the actions of another party. 

Indemnity can also refer to a legal exemption from loss or damages, as in the case of an indemnity clause in a contract, in which one party agrees to take the liability for loss or damage from another party. In this case, indemnity has the general meaning of "hold harmless."

Indemnity and Hold Harmless Agreements and State Laws

An indemnity agreement is sometimes called a hold harmless agreement, because it is an attempt to make sure that one party does not attempt to sue another party for negligence.

At present, 42 states have some kind of state laws that limit the inclusion of indemnity clauses or agreements. While indemnity agreements are a protection against lawsuits, they don't allow compensation for loss or damage.  

Even where these clauses are not restricted, courts have held that indemnity clauses must be expressed in "clear and unequivocal terms" (Maine) or, "very clearly intended" (Nevada).

 

Indemnity and Contracts

Indemnity usually arises in contracts, either as a separate indemnity agreement or as an indemnity clause in a contract. This language is included in cases where there is a possibility of loss or damage to one party during the term of, or arising from the circumstances of, the contract. The right to indemnity and the duty to indemnify ordinarily stem from a contractual agreement, which generally protects against liability, loss, or damage.  

Uses of Indemnity Agreements in Business

Indemnity in construction contracts. Indemnity clauses or agreements in construction contracts are an attempt to protect the contractor from lawsuits and losses due to negligence. Some states 

Indemnity and Insurance
One of the best examples of indemnity is insurance, which an insurance company indemnifies a property owner from losses or damage to that property. The business owner basically transfers the risk of having to pay for negligence to the insurance company. 

In another example, business owners may buy indemnity insurance for professional liability. Allena Tapia, Guide to Freelance Writing, explains how the concept of indemnity insurance can protect freelance writers.

Examples: Here is an example of an indemnity clause in a contract:

"I hereby release, acquit and discharge [company] and its agents and employees from any liability arising from any circumstance including the negligence of [company] or its employees.