What Is Fault Indemnity?

Fault indemnity is an agreement where one party agrees to defend against and pay for any legal claims that may arise against another party because of the actions of the first party. Basically, fault indemnity provides a way for one party to avoid risk of loss because of the actions of another party.

Indemnity is a legal term that refers to one party's agreement to hold another party harmless for acts caused by the first party. The first party assumes the risk of all financial repercussions that may result from the first party's actions. So, if the first party causes an accident or injury, and the second party is sued because of that accident or injury, the first party pays to defend the second party in that lawsuit and, if the second party must pay any damages in the lawsuit, the first party pays those damages for the second party.

The term "fault" means that the party providing the indemnity protection is the party who actually caused the accident or injury. Indemnity provisions can be either fault or no-fault. No-fault indemnity is broader because the first party providing the indemnity guarantee has to pay to defend the second party, even if the first party did not cause the accident or injury.

Fault indemnity provisions are common in sophisticated commercial contracts. For example, if a landlord leases property to a tenant, the tenant generally must provide a fault indemnity agreement in favor of the landlord. That way, if the tenant causes any harm to person or property because of the tenant's use of the leased property, then the landlord will not suffer any financial responsibility because the tenant will have to pay to defend and protect the landlord.

Fault indemnity provisions are also common in the insurance world. A general policy of business liability insurance should contain a strong indemnity clause. Most indemnity clauses in insurance contracts are actually no-fault indemnity clauses, but sometimes the insured business will only be able to obtain fault indemnity coverage. The key difference is that with no-fault coverage, the insurance company will pay for damages no matter who caused them, but with fault coverage, the insurance company only provides payment if the insured business caused the accident or injury.