What is indemnification?

If you are the indemnified party, an indemnification clause is simply a promise by the other party to cover your losses if they do something that causes you harm or causes a third party to sue you.  The key words are “indemnify”, “hold harmless”, and “defend”.  Indemnify and hold harmless mean the same thing — to make whole after causing a loss.  The word defend relates to responsibility for defending from law suits, and isn’t present in an indemnification provision if the indemnified party prefers to defend its own lawsuits (although the indemnifying party may be required to pay for it).  

Often, the indemnified party would ultimately be able to recover on the loss under another legal theory, such as breach of contract or tort.  So the primary effect of indemnification in most cases is to shift the cost of defending third party claims to the indemnifying party.  Even so, the indemnification provision is very useful for explicitly setting out the responsibilities of the indemnifying party.  And if the indemnification clause provides that it is the exclusive way to recover against the indemnifying party, it is very useful for setting parameters around such things as the scope, maximum liability, and time periods when a claim may be brought.  Indemnification provisions go hand-in-hand with insurance covenants.

Here is an indemnification clause from an Independent Contractor Agreement, with explanations in bold:

Contractor will, at its expense if Company requests, defend any of the following types of third party claims brought against Company or its directors, officers, or agents (collectively, “Indemnitees”): [If you are sued by anyone for any of the following reasons, the contractor will be responsible for defending you in court.

(i) any claim that, if true, would constitute a breach of the Agreement by Contractor; [Since the claim is regarded as true, the contractor must defend you based on whether the allegations in the complaint would constitute a breach of the contractor’s agreement.]

(ii) any claim related to injury to or death of any person (e.g., worker claims) or damage to any property arising out of or related to performance of any Work; [If the contractor’s work causes anyone to by physically injured or killed, the contractor must defend the suit.]  or

(iii) any claim that otherwise arises from the acts or failures to act of Contractor or its agents (including any claim that the Work Product infringes upon the rights of any third party) [If the contractor copies someone else’s code or the work infringes someone elses IP, and you get sued for it, the contractor would be responsible for defending the suit and making you whole.]. 

Contractor will indemnify and hold harmless the Indemnitees from any costs, damages, and fees (e.g., attorney fees and the fees of other professionals) reasonably incurred by any of them that are attributable to any such claim.  Should the Work Product, in whole or in part, constitute an infringement and any use of it be enjoined or threatened to be enjoined, Contractor will notify Company and, upon Company’s request and at Contractor’s expense: (i) procure for Company the right to continue use of the Work Product, or portion of it, as applicable; or (ii) replace or modify the Work Product, or any portion of it, with a non-infringing version, provided that the replacement or modification meets all Specifications to Company’s satisfaction.  If (i) or (ii) of the previous sentence are not available to Contractor, in addition to any damages or other remedies to which Company may be entitled, Contractor will refund to Company all amounts paid to Contractor for the applicable Work Product.

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