While indemnity and indemnification are familiar terms, do you know what they actually mean to you and your business? Hugh Kerr, a commercial lawyer with Caravel Law, shared his insights on indemnity clauses and the tips and tricks he’s learned throughout his practice. 

What is indemnity?  

While indemnity and insurance are often used interchangeably, they are not the same thing. Indemnity is a contractual agreement between two parties, where one party agrees to pay for potential losses or damages claimed by a third party.   

An indemnity clause can protect either party – the client or the supplier – in a contract. When done properly, indemnities ensure that each party assesses their risk and defines their responsibilities.  

They should always be considered carefully – indemnity negotiations can be a very time-consuming process for this reason. In the best-case scenario, both parties are prepared to consider the contents and the position of the other party in a commercially reasonable manner, otherwise the time and focus spent on indemnity can often come at the expense of other key contract provisions. 

For more on the basics of indemnity clauses, check out our blog post, Wait. What does indemnity mean? 

What should business owners keep in mind when creating and negotiating an indemnity clause?  

1. It is always important to ask: what is really at risk with this contract? Risk management is key. 
2. Always consider whether the indemnity protection can be limited to losses arising from negligence on the part of the counterparty. Some parties will think that the standard of care in a commercial relationship is not perfection, so an indemnity should not hold them to a perfect standard. It is important to find a commercially reasonable middle ground. 
3. Remember that the value of the indemnity is only as good as the counterparty’s ability to pay. It is important to be realistic in your request. 
4. Where relevant, ask for proof of insurance coverage and request to be added to that coverage as a named insured. That will help ease the claiming process. 
5. Insurance companies will often refuse to include an indemnity clause in an insurance policy on the basis that such a clause would effectively result in a duplication of the insurance (double indemnity). It may be possible to obtain indemnity from an insurer for services they provide which are not, by nature, insurance. Say, for example, purely administrative services.
6. If you request an indemnity clause, be prepared for the dreaded ‘mutual indemnity’ – the request that both parties agree to indemnify one another. This is often the first position taken by the counterparty on the basis that what’s good for the goose is good for the gander. This can be done ‘just because’ rather than for any specific reason. 
7. Beware of a laundry list of indemnitees – the individuals/groups to be indemnified by the counterparty. Ask yourself, is it appropriate for shareholders, affiliates or spouses and other such actors to be covered by this contract? 

Can a business use a standard indemnity clause found online or draft one using AI?  

It is not recommended. Presenting the ‘template indemnity’ can be problematic as it reflects the position of only one party and isn’t customized to the particular commercial relationship. Using standard templates can be a distraction from the negotiation of other, arguably more significant, business issues.  

Effective indemnity clauses should consider the particular goods or services which are being exchanged, and the nature of that relationship. Using AI to create the indemnity clause can result in the use of blunt or broad language. AI tools should be seen as a first step, they can create a framework to be customized by a professional for the situation.  

Indemnity clauses need to be very explicit about the situations and scenarios related to your business. It’s also essential that they are specific about covering any payments to a third party, including legal fees, compensation, interest, etc. Even if you settle on a standard indemnity clause, it should be reviewed by a legal professional to ensure there are no gaps or oversights. 

Should you always have an indemnity clause?  

Most commercial contracts contain at least one indemnity clause. And almost all businesses should assess risk and define responsibility when working with external suppliers and contractors.  

If you’re a company that hires many freelancers, contractors and consultants, your insurance will likely be narrow in terms of what it will cover. In these instances, indemnity clauses can be essential for your business to minimize risk. If you’re looking for assistance with an indemnity clause, we’re here to help! Get in touch with our team today.   

There will be instances in which an indemnity clause will prove difficult to obtain. When the counterparty is a start-up or a not-for-profit, be prepared to move forward without an indemnity in the interests of speed.  There’s no point wasting time and money when you can’t get blood from the stone. Test the value of the relationship first. If all goes well, risk allocations can be added later once the start-up has some resources.  

It may also prove difficult to obtain indemnity when working with certain government agencies, though for different reasons. Some of these government institutions are prohibited by their governing legislation from indemnifying their counterparties. Presumably, governments feel they can’t assume any additional liability.  

Similarly, some parties with sufficient bargaining power will refuse to provide an indemnity clause. This is often for no reason other than they do not need to provide one in order to get the business. If one party will not proceed with the contract without an indemnity clause, they can seek those services elsewhere. This can be frustrating, but it is a reality.     

Remember, even if the contract ends with no indemnity, one can still sue for breach of contract which brings its own degree of discipline to any relationship. No party wants to go through the headaches of litigation. Indemnification may be ideal, but it is not the only way of holding a party accountable.  

Caravel has a team of over 100 qualified and experienced lawyers, including those who can guide you through indemnity negotiations. Get in touch with our team today to find out more.