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Indemnity: How To Get the Other Guy To Insure You

There are few guarantees in life other than death and taxes. You used to be able to add that the Boston Red Sox would never win the World Series, now we've lost that sure thing. At least we still have the hapless Chicago Cubs to remind us all is right in the world.

But I'd like to talk about one form of guarantee you may not have heard of that comes up when I negotiate contracts, indemnity. If you've heard of indemnity I would like to congratulate you on reading the fine print in your contracts since these clauses are usually tucked towards the back with the rest of the fine print after the meat of the deal. You know, the sections you skip right over as you rush to the bottom to sign the thing and get if off your desk.

Most contracts have an indemnity clause where one or both parties to the contract agree to "insure" or bear the costs of protecting the other party from loss or damage. These clauses are one way people allocate risk in their contracts.

Usually the indemnity is some kind of financial guarantee someone will pay legal and other expenses incurred by the other side, to guarantee their portion of the contract. Craft your indemnity clauses carefully and you can get the other side to insure just about anything within reason, including lost profits, delays, claims, damages, losses and expenses. But like any other bill, getting the other side to actually pay could be a problem.

Sounds great you say, give me more indemnity. In fact, I'll have Double Indemnity! Unfortunately the only way you get Double Indemnity is to rent the 1944 Billy Wilder film and watch it this weekend.

While indemnity does sound like a great deal, there are a number of things that can trip up the unwary and the negotiating and drafting of these clauses is where your attorney should really earn his money.

Indemnity clauses should be drafted as clearly as possible. You want to clearly tell anyone who reads the contract later what the parties to the contract are trying to do with the indemnity clause. Clearly identify what kinds of potential loss you are trying to protect.

Don't overreach with your indemnity clause. You can't get the other side to guarantee anything and everything. You can't get them to guarantee the sun will come up in the morning, or that you will have good weather next weekend.

Asking somebody to guarantee the impossible is a good way to upset a judge. Judges are interested in the big picture questions of influencing and protecting important public interests. We want our judges to be happy, since they have the power to really mess with your contract. The judge could start with crossing out the offending sentence, tossing the entire indemnity clause, or if you've really gone to far and drafted your contract poorly, a judge could basically rip up your contract.

Judges really don't like to enforce indemnity clauses that protect really offensive conduct, such as intentional actions, product liability, or gross negligence. Courts don't like to be viewed as encouraging this type of offensive behavior by upholding an indemnity clause limiting or removing liability for really offensive actions.

I like to start drafting my contracts with indemnity clauses that really protect my client. I want the other side to put my client back where he started if they screw up, or to use a lawyer phrase, "to make my client whole again." I want them to do this quickly and with as little complaining as possible.

But in the early stages of contract negotiating and drafting I'm not interested in fairness, so I don't protect the other side at all. Let their attorneys draft their own indemnity clauses, or if the other side doesn't have a good attorney working for them they might overlook my drafting. Good for my client, bad for the other guy.

A very broad indemnity clause to start negotiating with might say "You pay if you hurt me, I hurt myself, or some other guy hurts me." By starting very broad, I can give a little to the other side and still leave my client well protected.

But most attorneys are going to spot my one sided drafting and come back with indemnity provisions of their own to protect their clients. When this occurs, I start to really earn my money as a professional negotiator as both sides hammer out an indemnity provision that best protects both parties.

Be sure to read carefully any indemnity language provided by the other side. Don't let them slip something by you where you wind up paying for damages that weren't your fault. You want to narrow your responsibilities to as narrow a situation or set of facts as possible.

What usually happens when sophisticated parties negotiate the indemnity clause is that the language moves towards an amicable agreement where each side agrees to insure negligent actions that harm the other party.

This kind of negligence insurance might seem to be a little bit of overkill. You are almost always liable for your negligence actions, so why bother telling the other side you will insure them for your negligence?

You want to avoid litigation. Even though with careful drafting your indemnity clause can get the other side to pay your court costs and attorney fees, nobody likes going to court. Why go to all that time and expense if some careful contract drafting can help you avoid the courtroom?

By coupling an indemnity clause with an alternate dispute provision such as mandatory mediation or arbitration you can take you disputes to a cheaper and faster resolution.

Indemnity clauses can be a very valuable tool when drafting your contracts and should be part of most of your agreements. Take advantage of any chance you have to shift risk to the other side, and have them insure you against a potential loss.


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