May 11, 2017

What Is Indemnification Anyway?

If you own a business, chances are you’ve signed an agreement with a vendor or are yourself a vendor.  And chances are that agreement says something about indemnification.

So, what is indemnification? Indemnification is where one party is responsible for reimbursing another party for any damages or costs.  This can happen either because the parties agree to it (preferably in writing) or because the parties have a relationship where the law assumes that indemnification makes sense.  So, for example, you might enter into a contract that contains an indemnification clause requiring you to reimburse the company you’re supplying services to if one of their employees is injured by your employees or equipment.  Alternatively, even without an agreement, if your accountant screws up your tax returns and you have to pay a fine to the IRS, the law might assume that your accountant should be responsible for that fine.

Why should you care?  One word: money.  If you agree to indemnify someone else, you’re potentially on the hook for any damages they face.  If you’re asking someone to indemnify you, you’re making them responsible for damages you might have.

What should you look for? As with anything you sign, you want to understand what you are agreeing to and make sure that the agreement covers what you want it to and does not cover other things.  Specifically, you want to understand what is covered by the obligation to indemnify.  For example, does the obligation to indemnify cover any damages or only damages to property? Is the party that is absorbing the costs (usually called the indemnitor) agreeing to pick up the other party’s legal fees? Are both (or all) parties to the agreement agreeing to indemnify one another or is only one party responsible for indemnification?

What can you do? Make sure you understand what you are agreeing to, that the language is clear and negotiate, negotiate, negotiate.  If you’re a small business entering a contract with a big company, you might not have that much leverage, but it never hurts to ask.