Contract terms addressing indemnity and requirements to hold another harmless or responsible for the defense of another are contract terms that appear in virtually all construction contracts. Despite their almost universal incorporation, they are frequently misunderstood!
Everyday business decisions are made, and contracts incorporating these terms are signed, yet these terms are often misunderstood, not fully appreciated, and found confusing by many.
In general terms, an agreement to indemnify another party means that you agree to compensate that party for its damages as outlined in the contract. Where a contract requires a contractor (indemnitor) to indemnify an owner or general contractor (indemnitee) for damages it incurs due to the contractor’s (indemnitor) wrongful conduct, the indemnitor is responsible for paying the indemnitee’s associated damages, such as from a third-party judgment emanating from the wrongful conduct. Essentially, you are agreeing to pay another for damages that another has incurred resulting from your work.
An agreement to hold a party harmless generally entails a release of the indemnitee from specific liabilities outlined in your contract and likewise an assumption of those responsibilities by the indemnitor. Thus, when you agree to hold another party harmless, it means you agree that that party will not be liable for certain losses or damages defined in the contract.
And where a party (promisor) has agreed to defend another party (promisee), when that other party (promisee) is forced to defend against a third-party lawsuit stemming from the promisor’s work, the promisor is responsible for the promisee’s legal costs.
While we have all heard the saying don’t sign anything you don’t understand, it is easy to overlook this simple lesson in practice. But it is critical that parties have a clear and informed understanding about what they are obligating themselves to in relation to the benefits of entering a contract in the first place. If in doubt, parties should seek counsel to clarify exposures and limitations.
To make an informed business decision, it is also important for parties to consult their insurers to be sure of what they are and are not insured against regarding these terms. Otherwise, the indemnitor and/or promisor may be solely responsible for all associated costs. You need to make sure that your policies of insurance do not preclude entering into indemnity agreements and that your insurance covers the indemnitee if you do agree to such terms.