What is Indemnification and Do I Need it in My Contract?
Have you been confused by the term “Indemnification” in your contract? Don’t worry, you’re not alone. Many people don’t understand what it is and why it's there. And while an “Indemnification Clause” is a very important clause to have in your contract, it's also likely going to be the most negotiated clause in your contract. This is because of its purpose. Indemnification language explains who is liable for third party claims and whether one party or both parties agree to hold the other harmless for a third party lawsuit?
Let’s get to business; what the heck is an indemnification clause?!
The legal definition of indemnification clause is “the obligation of one party to compensate the other party for harm or loss incurred”. In simpler terms, for service based businesses, if something bad happens to a third party during the event you are servicing then this clause tells you who is responsible for paying the resulting damages and/or liabilities. (Note indemnification can also cover direct claims, which are claims or causes of action that one contracting party has against the other, but this is very difficult to contract around and oftentimes caselaw prohibits you from indemnifying yourself from a negligent act. Thus, for our purposes here at TLP, we solely only draft Indemnification Clauses for third party claims).
Let's take a look at a situation WITH the indemnification clause.
For example, say you are a photographer at a wedding and there are a lot of people gathered on the dance floor which is butted up against a couple stairs. You’re on the dance floor snapping photos of everyone. Then, a guest happens to trip on the dance floor and breaks their leg. It's a bad break and there are a lot of medical bills. Now, a month later, the guest sues you, the couple, and the venue. BUT, you have an indemnification clause in your contract that says you are not held responsible for any third party claims and your client agreed to indemnify you and hold you harmless. This is an awful situation without question, but because there are too many third party occurrences that could happen while you’re providing services for a client, you want to ensure your client is the one taking on that liability and not you. Although this clause doesn’t preclude the third party from suing you and assigning you as another defendant on their insurance claim, you do have a super solid defensive argument to say, “Hey, the client agreed to indemnify me for this type of occurrence, so please take me out of this lawsuit.” (Legally speaking, you’d likely file a “Motion to Dismiss” the claim against you and the judge would then read this clause in your contract with the client and take you off the lawsuit. Hence, why this clause is another important safeguard for your business.)
Now, let's take a look at the same situation WITHOUT the indemnification clause.
First, you’re on the dance floor with the guests performing services, so you’re aware that the stairs are there and that they are likely dangerous to guests (especially, say, if alcohol is involved). Without an indemnification clause, because you’re a vendor at the event and are actively participating in the negligent situation, you will most likely be held accountable–alongside the venue–and will be on the hook for any damages to the third party guest. Regardless of whether the situation was your fault or not, if an indemnification clause is not in your contract then you are NOT covered.
What If Your Client Has An Issue With Your Indemnification Clause
The biggest issue we’ve seen recently with indemnification clauses is that it's the first clause clients may take issue with. This is because of the somewhat confusing legal jargon in it and what it may mean to your clients at face-value. Also, if your clients are attorneys (or their dad or Aunt Lucy or third-cousin-twice-removed is 😉) they tend to puff their chests a little at this clause. Lawyers are trained to negotiate indemnification. Which is why they are asking questions about it. But, this is easily resolved by simply telling your clients that you have no control over other people at the event and that in order to protect your business you ask them to take on the risk of their guests being there. That’s only fair. Also, if written correctly, these clauses should ensure that you are still liable for things IN your control, such as your intentional acts and willful/gross negligence. Explaining that difference to your clients asking to negotiate the clause usually settles their concerns. If they still come up with reasons to change the indemnification clause language, and say they want it to become a mutual indemnification, you can always switch the language in your contract if you’re comfortable with doing so. This would mean that both parties would indemnify and hold each other harmless for third-party claims against the other party.
What Happens If There Is No Indemnification Clause in Your Contract?
If there is no indemnification clause you are at a higher risk of liability when a dispute arises. Remember, your service contract is there to protect YOU. While all contracts should be somewhat two-sided and have clauses protecting the rights of your client, YOUR CONTRACT is mainly there to safeguard you. Thus, it's perfectly fine to have an indemnification clause that better protects you from third-party claims. And your clients should respect that.
Should You Sign An Indemnification Clause?
Lastly, we’ve seen venues asking vendors to sign a contract with an indemnification clause. This is definitely something you should look out for and note as a red flag. It's essentially the venue shifting liability away from them and onto you. Since you are likely not related to the venue whatsoever, you should be leery of signing such a contract. Instead, the venue should only be asking this of their clients (just like you are!). Honestly speaking, at any point in your business journey you should only sign an indemnification clause if you understand your rights and obligations completely. If you need help determining whether or not to sign these types of things, working with a contract attorney can help you make a better-informed legal decision.
Indemnification Clauses are confusing, yes, but are something needed in all contracts. Just writing out the word “indemnification” is long, weird, and scary. But here at The Legal Paige, we want to ensure you have the knowledge and expertise regarding indemnification language BEFORE a client inquires about it. Be aware that you may go your entire career without needing to invoke your indemnification clause, but it will save you tremendously if you ever do. You can never be too safe when it comes to protecting your business, even from the oddest of situations, so be sure to add an indemnification clause to your contract for those rainy days.
→ See our template Indemnification Clause, featuring three options for indemnification language you can use in your contract.
THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. EVERY SITUATION IS DIFFERENT & IS FACT-SPECIFIC. A proper legal analysis is necessary based on your location and contract. Consult an attorney in your home state for advice regarding your contract or specific legal situation.