The primary function of an indemnification clause is to allocate risk between the parties over liability that arises from the contract. Depending on the specifics of an indemnity clause in a contact, it can shift all the risk of something going wrong to you and leave the other party free to walk away, even if the other party is partly at fault. Even worse, if someone sues the other party, you may be obligated to pay its attorney's fees and any judgment against the party.
- Begin by analyzing the risk involved.
- At one end of the spectrum, the clause can address "any claim or loss that arises out of the contract," which is the broadest form of risk allocation. This means that any claim related to the performance of a contractual duty is covered.
- Narrower forms of risk allocation address particular occurrences, such as risks arising from a breach of the contract or third party claims for a specific subject matter. Example: a contract for a license to perform a Broadway musical that contains an indemnification provision protecting from claims of copyright infringement.
- Next, determine whether you are indemnifying the contractor or the contractor is indemnifying you. Then analyze the level of indemnification you are either providing or receiving. There are generally three levels of indemnification:
- Limited. This provides for you to indemnify the contractor for any loss resulting from the first party's acts or omissions (or the other way around), but only to the proportional extent arising from the first party's fault.
- Intermediate. You indemnify the contractor against losses (again, or the other way around), but only in situations where the contractor party did not do anything wrong.
- Full/Broad. You indemnify the contractor (or vice versa) from any loss despite the contractor's active negligence. This makes you, in essence, the insurance company for the contractor.
Indemnification clauses have the most obtuse and complex language in a contract. All too often, because of the complexity of the language, one party or the other will not thoroughly review the provision. Be sure that you review all language, including boilerplate language, which may require you to fully indemnify the contractor. You should only agree to such a provision after you and your attorney make a full evaluation of the respective responsibilities of the parties and the risks associated with each party's duties.