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 Using indemnity provisions to protect your
business
By FRANK E. PEREZ, ATTORNEY
FRANK E. PEREZ &
ASSOCIATES
The contracts your have with your clients are probably the most important documents you can use to protect your business. Those contracts should not be viewed simply as documents that spell out your obligations to your clients (and their obligations to you); they should be used as a tool to protect your business.
One of the most useful and common provisions included in contracts is the indemnity provision, or what is commonly referred to as a “hold harmless” agreement. Everyone would like to shift the risk of doing business to others, and this is done consistently and legitimately in business. Indemnity is a common method used to shift risk or liability to another. But indemnity is tricky. Too many contracts contain indemnity provisions drafted by persons not familiar with indemnity law. Those provisions often end up as useless words on a piece of paper. For example, language in a contract that stated one party was to indemnify the other “from any and all claims ... of any nature whatsoever’’ has been held invalid. Yet, many contracts contain similar language. Does your contract have this language?
Valid indemnity provisions are limited to losses that arise out of the work being performed pursuant to, or related to, the contract. They should state this clearly in the provision.
The indemnity provision should also be made “conspicuous” because the parties must be given “fair notice” of their indemnity obligations. There are exceptions to this rule, but to avoid confusion or misunderstanding, the indemnity provision should be bolded and in a larger font than the rest of the document. You can also use a different color font. This may look awkward, but it is better to be safe in this regard than to worry about a pretty document.
A number of parties also want to be indemnified for their own negligence. In other words, they want the other side to indemnify and hold them harmless, even if their own negligence caused the injury. This is possible and common. Care must be taken, however, to ensure compliance with applicable laws governing indemnity. For example, in Texas, in order to have a valid indemnity provision protecting against one’s own negligence, the provision must comply with the “express negligence” rule. This means that the indemnity provision must specifically state that indemnity is being provided for the negligence of the indemnitee. Absent this specific language, clearly stated in the provision, the indemnity is likely to be invalid.
Another indemnity issue arises all too often: The party who agreed to indemnify you is financially broke, and cannot satisfy its indemnity obligations.
You can protect against this. First, make sure that the indemnity provision is backed by sufficient insurance coverage to pay, in case of this contingency. Care MUST be taken, however, to make sure the indemnitor’s insurance company knows that the indemnitor has agreed to such indemnity, and that the insurance company has agreed to take on this contingent loss. In other words, if you are the indemnitor, make sure you provide your insurance carrier a copy of the indemnity agreement BEFORE you sign the contract, and make sure they will cover it. If you are the indemnitee, make sure you get proof of insurance from the indemnitor. (On a side note, it is wise not to rely on an ACCORD or Certificate of Insurance for proof of insurance, since these documents do not create coverage where none exists in the insuring agreement – get an actual copy of the insurance policy.)
This article merely scratches the surface of the many issues involved with indemnity provisions. Please consult your trusted legal source to make sure your contracts have everything possible to protect you.
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