Considerations in Drafting Indemnity Provisions

Generally, parties are liable for their own negligent conduct.  An indemnity provision in a contract reallocates this liability from one party to another.  Viewed practically, an indemnity clause shifts insurance obligations from one party (“indemnitee”) to another party (“indemnitor”). Under an indemnity clause, the indemnitor agrees to pay the indemnitee for losses resulting from a claim brought by a third party. Absent explicit language assuming the obligation to defend, the party providing indemnity has no obligation to provide or assist in defending claims. Almost every contract includes an indemnification clause. It is important to read the clause carefully when entering into a contract of any nature, as the precise language of the clause can make a dramatic difference in each party’s financial obligations.

meet-up-1538121A typical indemnity clause looks something like the following:

To the extent caused by A’s negligence or willful conduct, A agrees to indemnify B of and from all reasonable claims, losses, causes of action, damage, lawsuits, and judgments, including attorneys’ fees and costs, provided that such claims, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property. Party A shall indemnify B only for the percentage of responsibility for the damage or injuries attributable to Party A. Nothing herein shall be interpreted as obligating A to indemnify B against its sole negligence or willful misconduct.

This is a basic example for illustrative purposes.  Indemnification clauses should be tailored to the actual circumstances of the parties’ relationship and business objectives. The parties should focus on using precise language so as not to create more liability than intended:

  • Consider the impact of a phrase like “caused in whole or in part” as it presumes liability where the other party may be partly at fault.  Instead, as in the example above, use the phrase “to the extent that” to limit the indemnitor’s liability to its proportional fault.
  • Consider capping the exposure covered by the indemnification clause. The indemnitor may want to limit its exposure to a maximum dollar amount.
  • The phrase “any and all” in reference to the type of claims covered is common and very broad.  Indemnitors concerned about overbroad indemnification should consider limiting language such as “from all reasonable claims . . ..”
  • Carefully identify the types of injuries and damage covered by the indemnity clause. In the example above, the “[p]rovided that such claims, loss, or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property.” language limits the type of damage, expense, or loss the indemnitor is willing to reimburse the indemnitee for. In most cases, the language is intended to mirror the limits of insurance coverage available to indemnitees as additional insured parties under the indemnitor’s commercial general liability policy.
  • Consider an express obligation on the indemnitee to mitigate loss.  An obligation to mitigate damages requires the indemnitee to take reasonable action to reduce the loss suffered as a result of any harm. For instance, where a commercial landlord evicts a tenant, the landlord is required under California law to take reasonable steps to look for a new tenant as soon as possible so that the commercial space does not sit empty for the remaining term of the tenant’s lease increasing the tenant’s liability for lost rent. The obligation to mitigate damages by the indemnitee creates an additional limitation on the indemnitor’s obligations. While there is generally a duty to mitigate under California law, including express mitigation language in indemnity provisions clearly puts the indemnitee on notice that it cannot just sit idly by while damages get worse. The indemnitee needs to take reasonable steps to avoid excessive damages.

The key is to carefully think about the extent of the indemnification intended and to craft the language of the indemnification clause to mirror the parties’ intent.

Indemnification provisions can be and often are lengthy and complex, the complete coverage of which is beyond the scope of this article. What may appear to be a minor difference in word choice can make a significant difference in liability. It is therefore important to take the time to evaluate the terms closely and ensure that they adequately reflect the parties’ intentions regarding the allocation of liability. It is advisable to consult an experienced San Diego contract lawyer before entering into these types of negotiations.

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