Indemnification – What is it? Why do you need it?

If you have ever read a contract and did not understand at least one of the provisions, chances are it was the indemnification section.  Yes, the words are confusing and there might be only a single long sentence in the whole paragraph, and that paragraph could be as long as a full page.  Ugh!  Even I’ve had to re-read these sections multiple times!

The concept of indemnification, however, is not that hard to understand.  Essentially, to indemnify someone is to promise that you will take responsibility for any financial expense or damage you cause but which they are held responsible for.

An Example…

As an example, let’s say that a general contractor brings on a flooring installer as part of a home remodel.  During installation, the flooring installer drops a box of expensive tile and it is completely ruined.  The homeowner, who has already paid for the box of tile, may demand that the GC buy the replacement because the homeowner hired the GC to manage the remodeling project.  But the financial damage was really caused by the flooring installer who dropped the box.  If the GC had an indemnification agreement with the flooring company, the flooring contractor would reimburse the GC for the cost of the replacement tile.  Ultimate financial liability would fall to the party who actually caused the damage.

Another Example…

Likewise, consider an event planner who signs a contract for meeting space at a convention center on behalf of her client who is holding an employee conference.  The event planner will want to have an indemnification agreement with her client so that if the client’s employees cause any damage to the meeting room, she will be able to recover any financial loss – that she had to pay to repair the damage at the convention center – from her client, whose employees actually caused that damage.

But what about Insurance?

Liability insurance is the usually the first line of defense for a business owner when unexpected damage occurs.  So in the example above, if the damage to the convention center was significant, the event planner might file an insurance claim to pay for the repair expense, but then the indemnification with her client would likely mean that the client’s insurance carrier would reimburse the event planner’s insurance carrier, or actually fund the payment directly to the convention center.

So do I need this?

If you are a business owner, it’s critical to know what risks your company faces – both in the ordinary course of business and in more unexpected circumstances.  One-size-fits-all indemnification agreements are not a good idea because every business (and the risks it faces) is unique and the indemnification you need to secure can be very different from the indemnification any other company needs.

Accidents will happen, and indemnification exists to protect the not-at-fault parties. But if you fail to get an agreement with the other professionals you work with, you risk taking on the financial responsibility yourself – even if you are not truly at fault.

If you believe your company is not adequately protected, let’s discuss the concerns you have about your company’s day to day risk factors, and let’s create an indemnification agreement that will give you peace of mind.  Just click below to schedule some time to talk.

NOTE: THIS ARTICLE IS FOR GENERAL INFORMATIONAL PURPOSES. IT DOES NOT CONSTITUTE LEGAL ADVICE, NOR DOES IT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. EACH SITUATION IS DIFFERENT. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE YOUR LEGAL RIGHTS, REMEDIES, AND DUTIES.

By Wendy M. Anderson, Esq.
Law Office of Wendy Anderson, PLLC
480-825-4509
Contact Me Today