Table of Contents
- The Basics: What is an Indemnity Agreement?
- When Do I Need One?
- What Happens if I Don’t Use One?
- Common Situations
- What Should be Included?
1. The Basics: What is an Indemnity Agreement?
An Indemnity Agreement is a legal document that transfers risk from one party, the Promisee, to another party, the Promisor. The Promisor promises to indemnify or hold the Promisee harmless against future claims, losses or damages related to a particular activity.
A simple Indemnity Agreement will identify the following basic elements:
- Promisor: the name and address of the person or corporation making the promise to indemnify
- Promisee: the name and address of the person or corporation receiving the indemnity
- Activity: the contract or agreement between the parties that might give rise to future losses or damages
- Indemnity: what will be covered under the indemnity
The Promisor may also be called the Indemnitor, Indemnifier, or Indemnifying Party. The Promisee may also be called the Indemnitee or Indemnified Party.
What are the obligations?
The Promisor in an Indemnity Agreement promises to “indemnify”, “hold harmless”, and “defend” the Promisee. Below is a closer look at what each of these mean.
Indemnify
The word “indemnify” means that the Promisor will reimburse the Promisee for any loss or damages the Promisee incurs.
Hold Harmless
To “hold harmless” the Promisee means the Promisor promises that he or she will not sue or hold the Promisee liable for any injuries or damages.
Duty to Defend
If the agreement includes the word “defend”, the Promisor is also promising to defend the Promisee against third party suits.
The statute of limitations on an indemnity claim, which varies by state, begins to run on the date a claim is paid out by the Promisee.
As a reference, an Indemnity Agreement is known by other names:
- Hold Harmless Agreement
- Indemnification Agreement
- Contract of Indemnity
- Indemnity Contract
- No Fault Agreement
- Reparation Agreement
- Assumption of Liability Agreement
- Agreement to Indemnify
Hold Harmless Agreement PDF Sample
The sample hold harmless agreement below details an agreement between the indemnitor, ‘Terry C Winter’ and the indemnitee, ‘Daniel C Tracey.’ In return for holding Terry C Winter harmless against potential claims, Terry C Winter agrees to construct an addition to Daniel C Tracey’s home.
Hold Harmless (Indemnity) Agreement2. When Do I Need One?
All activities come with a certain amount of risk. An Indemnification Agreement allows parties to shift risk based on their needs and protect themselves against future lawsuits or losses. It acts as a form of insurance and also incentivizes parties to enter into contracts they wouldn’t otherwise enter into.
For example, if you wanted to remodel your kitchen, you may be reluctant to hire a contractor to come into your home for fear that if the contractor or one of his employees gets injured in your home, they might sue you. By having the contractor sign this agreement, you can protect yourself against such lawsuits. The contractor promises not to sue if he gets injured. And if the contractor’s employee gets injured and sues you, the contractor will have to defend the suit or reimburse you for your expenses in defending the suit.
It can also protect you against third party claims. If the contractor accidentally drops your old kitchen sink onto the neighbor’s new Tesla Model S, this agreement can shift the responsibility for the damage to the contractor instead of you.
Parties can negotiate how broad or how limited the Promisor’s indemnification obligation will be.
Types of Indemnity
There are three general types of indemnity clauses:
Type 1 – Broad Indemnification
A Type 1 indemnity clause is the broadest form of indemnification. The Promisor promises to indemnify the Promisee against the negligence of all parties, including third parties, even if the third party is solely at fault.
In most states, broad form indemnity provisions are invalid in construction contracts.
Type 2 – Intermediate Indemnification
A Type 2 indemnity clause is an intermediate form of indemnification. The Promisor promises to indemnify the Promisee against the negligence of the Promisee and the Promisor. The indemnity does not extend to the actions of third parties.
Type 3 – Limited Indemnification
A Type 3 indemnity clause is the most limited form of indemnification. The Promisor promises to indemnify the Promisee only against the negligence of the Promisor. The indemnity does not extend to the actions of the Promisee or third parties.
Below is a chart illustrating who is covered under the different types of indemnity clauses:
| Type 1 | Type 2 | Type 3 | |
|---|---|---|---|
| Promisor's Negligence | X | X | X |
| Promisee's Negligence | X | X | |
| Third Party's Negligence | X |
In most states, including California, the Promisor cannot be held liable for damages caused solely by the Promisee.
Be sure you have carefully read the indemnity language and fully understand the extent of the indemnity you are giving or receiving.
What is negligence?
A person is negligent when he or she does not act with the level of care an ordinary prudent person would under the same circumstances. There are two types of negligence – passive negligence and active negligence. Passive negligence occurs when a person fails to act – for example failing to discover a loose board in the floor. Active negligence occurs when a person performs an action that causes damage – for example improperly installing floorboards causing one to become loose. Many states prohibit indemnity for active negligence in commercial contracts.
Many states prohibit indemnity for active negligence in commercial contracts.
3. What Happens if I Don’t Use One?
This agreement allows all parties to a contract to know who will bear the responsibility if something goes wrong and prepare accordingly. Without it, you may get sued or be responsible for damages that were not your fault. Or you may have no incentive to do your job with reasonable care.
Here is some of the suffering using this agreement could help avoid:
| Promisor | Promisee |
|---|---|
| Lost Money - Unable to get a job or contract - Did not obtain proper insurance | Lost Money - Responsible for unanticipated losses and liabilities - Did not obtain proper insurance |
| Lost Time - Extended argument involving attorneys in a courtroom | Lost Time - Time spent fighting legal battles instead of building a business |
| Mental Anguish - Prolonged problem hanging over your head | Mental Anguish - Fear of hiring another contractor |
4. Common Situations
An Indemnity Agreement is often used when two parties enter into an agreement where there is a potential risk of loss or lawsuit in the performance of the agreement.
Here are some examples of when you might use one:
| Indemnitor | Indemnitee |
|---|---|
| Tenant | Landlord |
| Independent Contractor | Homeowner |
| Rental Car Driver | Rental Car Company |
| Employee | Business Owner |
| Pet Owner | Kennel or Dog Groomer |
| Subcontractor | Contractor |
| Company | Director or Officer of a Company |
| Client | Consultant |
| Supplier | Customer |
| Homeowner Refinancing Home | Title Company |
| Thrillseeker | Skydiving Company or Amusement Park |
Common law indemnity, or implied or equitable indemnity, allows a party to file a cross-complaint or separate suit against a third party who is in whole or in part responsible for any losses or damages, even if there is no Indemnity Agreement. Laws regarding equitable indemnity vary by state.
5. What Should be Included?
A simple Indemnity Agreement should generally have at least the following:
- Who is the Promisor and Promisee
- What is the activity giving rise to the indemnity
- Where are the Promisor and Promisee located
- When is the effective date of the agreement
- Why might the Promisor not be obligated to indemnify the Promisee
- How broad is the indemnity being given
In addition to the above basic provisions, here are some additional terms you may want to include:
The Indemnity
- Limitations – identify any limitations on the indemnity, such as only personal injury or death, and any cap limits on the amount of the indemnity
- Notice of Claim – the Promisee must tell the Promisor about any claims within a certain amount of days
- Duty to Defend – the Promisor can take control of the defense of the claim, otherwise the Promisee can pursue its own defense and seek reimbursement
The Agreement
- Amendments – amendments must be in writing and signed by both parties
- Assignment – parties can only assign the agreement if the other party agrees in writing
- Notices – where notices about the agreement will be sent
- Governing Law – which state’s laws governs the agreement
- Disputes – how disputes regarding the agreement will be handled: litigation, arbitration, or mediation
Legal Speak
- No Waiver – any waiver of any part of the agreement must be in writing
- Severability – if one part of the agreement is ruled invalid, the rest of the agreement will not be affected
- Counterparts – the agreement can be signed separately
- Entire Agreement – the agreement supersedes all prior agreements
An insurance policy may help cover liabilities owed under an Indemnity Agreement.
