What Is an Indemnity Clause? An indemnity clause – also called a “hold harmless” provision -- is a contractual agreement that shifts risk or liability from one party to the other. In essence, when a party gives an indemnity, it agrees to be responsible for claims asserted against the other party. Indemnity provisions can be narrow -- limited to a very carefully defined set of claims -- or they can broadly apply to almost any claim. The most controversial indemnity provisions seek to require one party to assume responsibility for all claims of any type or nature relating to the performance of the contract, even if the liability resulted from the negligence or fault of the indemnified party.
Why Do Parties Demand Indemnity Provisions? Contracting parties seek indemnity provisions for many reasons, some completely legitimate, and some less so. When a customer purchases machinery that must be installed by the manufacturer at the customer’s plant, the customer wants to be sure that the manufacturer will exercise due care to avoid damage to persons or property while working at the plant, and will be responsible if the manufacturer's personnel are at fault in causing property damage or injuries. Few would dispute these are legitimate concerns.
Many companies, particularly large companies, try to use indemnity clauses as part of their overall risk management program. These companies may have increased the self-insured retentions (SIR) in their insurance policies to $1,000,000 or more to decrease their insurance premiums. (An SIR is roughly equivalent to a deductible). In such instances, a company may try to use indemnity clauses to try to cover the gap created by the SIR.
Companies looking to cover an SIR or simply trying to shift as much responsibility as possible will often demand extremely broad indemnity provisions. These provisions in essence seek to shift the risk to the manufacturer if anything bad happens relating to the equipment -- before, during or after installation -- regardless of whether the manufacturer is at fault. These indemnities even include claims resulting from the customer’s fault. These types of indemnities are controversial.
Because very broad indemnity provisions are controversial, many states have enacted anti-indemnity statutes. These statutes were often adopted at the request of the construction industry (particularly subcontractors). These statutes limit the enforcement of indemnity provisions that apply to claims resulting from the fault (sometimes only the sole negligence) of the party to be indemnified. These statutes vary substantially in their scope and application. Further, because they were adopted for the construction industry, they may not apply to the installation of machinery. In order to determine whether an anti-indemnity statute exists and applies, it is necessary to research the law of the state applicable to the contract.
Basic Considerations Regarding Indemnity Clauses. Relying on the possible application of an anti-indemnity statute to avoid an indemnity clause is probably not an optimal strategy. In most instances, negotiating a reasonable indemnity clause the manufacturer can live with is preferable. From the point of view of a machinery supplier, here are some of the basic considerations that apply to giving indemnity clauses to customers:
· Indemnity clauses should apply to third-party claims. The proper scope of an indemnity is to provide protection against claims by third parties against the indemnified party. Risks and responsibilities of the contracting parties regarding performance can and should be addressed in other provisions specifying the parties’ respective scope of work, the manufacturer’s warranties, etc.
· Indemnity clauses should not be open-ended. If possible, an indemnity provision should apply only to a particular part of the project – typically installation or other activities performed at the customer’s site – or should at least have a time limit.
· Indemnity clauses should insurable and insured. If a manufacturer unfortunately has an indemnity claim, it wants that claim to be covered by its liability insurance. As a general matter, liability insurance applies to third party claims (see above) for bodily injury or property damage. Accordingly, indemnity clauses should be limited to such third party claims and should be fault based. Before agreeing to an indemnity clause, it is a good idea to run the contractual language by the manufacturer’s insurance agent or broker to confirm that insurance should apply in the event of a claim.
One of the best tips for negotiating an indemnity clause is to insist that the indemnity clause be mutual. A mutual indemnity clause could, for example, provide that each party will indemnify the other from third party claims for bodily injuries or property damage caused by the fault of the indemnifying party. Often, the other party’s view of what is fair and reasonable changes when they are also asked to provide indemnification.
One final note: Remember that when a manufacturer is negotiating an indemnity clause with a subcontractor or subsupplier, the manufacturer is acting as the customer. As such, the roles are reversed. However, a key concern should be making sure that the subcontractor’s obligations are backed by its liability insurance.