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Last, but NOT Least: Why You Should Take a Closer Look at Your Next Indemnification Clause

Indemnification clauses appear in nearly every agreement, but they are often overlooked as mere boilerplate provisions after the parties have painstakingly negotiated all of the other terms. It is not uncommon for parties to simply re-use the indemnity language from a prior agreement without considering whether it is a good fit for their current project. This can be a big mistake that may lead to ambiguities and uncertainties if a dispute arises down the road. A standard or canned indemnification clause might work to undo all of the effort that has gone into properly allocating risk. These clauses often contain language such as “notwithstanding anything to the contrary herein,” or the like, which can alter and override other provisions in the agreement.

Indemnification clauses are arguably the most important part of an agreement when an accident or dispute arises on a project. Therefore, they deserve an extra look before finalizing an agreement. Here are a few issues to keep in mind when reviewing your next indemnification clause:

  • Have you included all necessary parties?

    • Any party who could face potential liability should be included as an indemnified party. This often includes entities and persons related to the contracting parties, not just the parties themselves.

    • A well-drafted indemnity clause will ensure that all parties are liable for the result of their own work and negligence and that of any party that they have hired to work on a project. This includes employees, agents, subcontractors, or any other similar party.

  • What exactly will be covered?

    • An indemnification clause should provide for the defense of an indemnified party in addition to the recovery of damages.   In many instances, a clause can be drafted to protect against claims asserted as well as an ultimate finding of liability. This can be particularly important in the context of projects involving subcontractors and material suppliers who may not have direct agreements with an owner or general contractor.

  • While a clause should fully protect each party from liability for another party’s negligence, it is important not to go too far. The majority of states have statutory prohibitions against indemnification clauses that seek to hold a party liable for the negligence of another party it does not control. See e.g. Tex. Ins. Code § 151.102; Cal. Civ. Code § 2782; N.Y. Gen. Oblig. Laws § 5-322.1; Ga. Code § 13-8-2; Va. Code § 11-4.1.

  • An indemnity clause is often only worth as much as the underlying insurance coverage.

    • It is important to examine the required insurance coverages and limits to make sure all parties can satisfy their indemnity obligations.

  • Finally, be sure to make the clause conspicuous and satisfy any other requirements regarding the formatting of an indemnification clause. These requirements often differ from state to state.

Taking the time to carefully review the indemnification provision in each contract with your business and legal team will help to ensure consistency and enforceability. This is an easy way to avoid unexpected liability.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 9

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About this Author

Aimee Cook Oleson Special Counsel Business Trial Practice Group Sheppard Mullin Law Firm Dallas
Special Counsel

Aimee Cook Oleson is special counsel in the Business Trial Practice Group in the firm's Dallas office.

Areas of Practice

Aimee's practice focuses on complex, high-stakes business and tort litigation for corporate entities throughout Texas and the U.S. She regularly prosecutes and defends claims for clients in the energy, healthcare, insurance, multi-level marketing, construction and financial industries. In addition to general counsel, owners and executives, Aimee’s clients include third-party...

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