Understanding Indemnification Clauses
Indemnification clauses can be found in various business contracts, from commercial construction corporations to 1099 gig contractors. Though it’s a common clause in many contracts, it’s the source of confusion for many. Understanding the purpose and elements of indemnification clauses is essential, whether you’ve been asked to sign a contract with an indemnification clause or a business owner looking to protect your business with the same clause. Learn more about what indemnification clauses are below.
What’s an Indemnification Clause?
Indemnification clauses are designed to protect or “hold harmless” one party from the liabilities and damages caused by another party. Indemnification clauses free you from the responsibility of paying for damages someone may suffer at your business or job site due to actions by a third party. In business contracts, indemnification clauses specify that a third party (not your business) is responsible for compensating someone due to the actions of another party.
Purpose of an Indemnification Clause
The primary purpose of an indemnification clause is to make another party responsible for paying for the losses, damages, and out-of-pocket expenses of defending your business in court if someone should sue your company under specific circumstances. When you indemnify someone, you’re taking on the responsibility to pay for the losses and damages on behalf of another party.
Examples of Indemnification Clauses
Here are a few examples of how indemnification clauses work in real-life scenarios:
- A landlord leases a building to a dance studio. The landlord adds an indemnification clause to the leasing contract, which states that the dance studio is responsible for paying for any damages and court costs if someone sues the dance studio after suffering an injury at the facility.
- A wedding venue contracts a DJ. During the festivities, a wedding guest trips on one of the DJ’s power cords and is injured. The wedding guest sues the venue and DJ. Since there was an indemnification clause in the DJ’s contract, the DJ is responsible for reimbursing the wedding venue’s costs of defending themselves in court and the fees for the lawsuit brought against them.
- A business owner hires a commercial contractor to outfit a new office building. During construction, a pipe burst and water spilled on the floor. A customer walked by and slipped and fell. The customer sues the business owner. However, since the business owner included an indemnity clause in their contract, the contractor is responsible for reimbursing the business for the customer’s losses and damages.
Elements of Indemnification Clauses
Indemnification clauses should be narrow in scope and specific. Vaguely worded clauses are hard to defend in court. Several elements need to be included to craft an effective indemnification clause. First, language such as “defend,” “hold harmless,” or “indemnify” should be included in the clause. The clause should name the indemnifying party (the person responsible for paying damages) and the indemnified party (the person who suffered the harm or loss). The clause should state specific events and instances that would cause this clause to take effect, along with the maximum compensation a company would receive for out-of-pocket expenses and court fees. The clause should also include types of exclusions and a statute of limitations for when claims can be brought against the indemnifying party.
Drafting Indemnification Clauses in Business Contracts
In Florida, indemnification clauses for construction contracts must follow the guidelines stated in Florida Statute 725.06. Indemnification clauses are a highly complex aspect of business contracts, so it’s important to have experienced business attorneys like the ones at The Boutty Law Firm help you draft and review the indemnification clause to ensure its legally enforceable. Call our office at (407) 622-1395 or use our online live chat feature to get started.
