Within the commercial sector, businesses must protect themselves from liability that results from a faulty service or product offering. A contract of indemnity allows businesses to transfer these risks to a third party, such as a supplier or an insurance company. Business and insurance contracts often contain indemnity clauses that may differ in type depending on the types of risks involved.
Contract of Indemnity
A contract of indemnity -- also known as a "hold harmless" clause -- provides a method for transferring financial risk to a third party using a written contract. A contract of indemnity lists the parties involved, the types of situations covered, and the party or parties responsible for shouldering the risk. In effect, a company that “indemnifies” another company agrees to pay for liability related to a particular product or service. Indemnity clauses appear in commercial and legal contracts, some of which include loan agreements, supply agreements, leases and licensing agreements.
Indemnity clauses place legal responsibility for risk onto a particular company or party, and in some cases increase the actual degree of risk a company shoulders when compared to common law practices. By using an indemnity clause, the indemnifying company may potentially assume more than its fair share of risk from a legal standpoint. For example, a supplier may assume all liability associated with a particular product even if the product becomes damaged due to an accident caused by the retailer. Other types of indemnity clauses may only take on a limited degree of risk that accounts for unforeseen accidents or mistakes, while still others only protect against accidents or mistakes caused by the indemnifying company or the party shouldering the risk.
Types of Indemnity
The conditions listed in a business contract determine the amount or extent of indemnity one party shoulders on behalf of the other. A business contract will incorporate the types of indemnity needed based on the nature of the business transaction. Some contracts may assign indemnity for compensation awards due in cases involving personal injury or property damage, such as construction contracts. Other contracts may assign indemnity for breach of confidentiality or negligence, such as with health care-related contracts. In cases where legal proceedings occur, a contract of indemnity may require the indemnifying party to pay any resulting legal fees.
A business that carries general liability insurance coverage or umbrella liability coverage may already have a range of different types of indemnity clauses included within the conditions of the insurance contract. In many cases, an umbrella policy may incorporate broad indemnity protections, which cover damages or injuries caused by a product or service regardless of who's to blame. This means a liability policy may pick up where a contract of indemnity between a business and a supplier leaves off, depending on a policy’s coverages. State laws may also alter the conditions of a contract of indemnity in cases where laws limit the amount of risk or indemnity a contract can transfer.
- Opportune Risk Bridging, LLC: Top Ten Contract Clauses – Indemnity; T. Galganski; December 30, 2009
- U.S. Department of Health & Human Services. “MEPS Insurance Component Glossary of Health Insurance Terms.” Accessed June 24, 2020.
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- National Bureau of Economic Research. “Indemnity vs. HMO Plans: Why the Cost Difference?” Accessed June 24, 2020.
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Jacquelyn Jeanty has worked as a freelance writer since 2008. Her work appears at various websites. Her specialty areas include health, home and garden, Christianity and personal development. Jeanty holds a Bachelor of Arts in psychology from Purdue University.