Indemnity Agreement: What is it and how can it help my business?
Understanding your business’s risk exposures is the cornerstone to managing them. Whether your business relies on outside vendors to provide goods and services, or you’re a provider of goods and services to your clients, you should be aware of how to take contractual precautions to protect your business against potential losses or damages. An indemnity agreement secured by an additional insured endorsement is a risk-transfer tool that can help insulate your business from potential risks.
It is a common practice to enter into contractual agreements with those involved in a project to formalize the terms and responsibilities for all parties. These contracts often include an indemnity agreement, also known as a hold harmless clause, as a means to transfer the risk of future losses or damages from one party to another.
There are three primary types of the indemnity agreement or hold harmless clauses typically contained in contracts.
- Limited – obligates the indemnitor (the party paying compensation) to hold harmless the indemnitee (the party receiving compensation) only for the indemnitor’s own negligence.
- Intermediate – obligates the indemnitor to hold harmless the indemnitee for all liability except that which arises out of the indemnitee’s sole negligence.
- Broad form – obligates the indemnitor to hold harmless for all liabilities, including the indemnitee’s negligence.
To support the terms of the indemnity agreement, the contract will often include insurance requirements. These spell out the insurance required by the various parties entering into the contract. It is common for one party to include another as an additional insured under its Commercial General Liability (CGL) policy. For example, owners or general contractors of construction projects commonly require those who are actively involved in the project operations, such as subcontractors, to sign a contract and name them as an additional insured on their CGL policy to limit their liability for damages caused by the subcontractor.
ALIGNED recommends that you carefully review the indemnity agreement with a qualified lawyer prior to finalizing the contract to determine the extent of your company’s liability. Once the scope is understood, you may want to negotiate the terms to limit your exposure. The application and enforcement of an indemnity agreement does, however, depend upon the statutory and common law of the jurisdiction in which enforcement is sought.