Q&A #77 – Should every contract have indemnification language?
Question: My nonprofit organization’s standard contract templates have a provision requiring each party to “indemnify” the other party. Recently we have gotten resistance to this language from the parties we contract with. Is indemnification language necessary for every contract, or can this be safely deleted?
Answer: Whether indemnification language is desirable and appropriate depends on the specifics of each contract as well as each party’s bargaining leverage and tolerance for risk. It is important to think carefully about the risks that could arise from each contract and pay close attention to how the language is phrased. Depending on the circumstances, indemnification language may not be necessary, and, if drafted improperly, could cause more harm than good.
Indemnification is a way for two parties to allocate risk in a contract. A party that is required to “indemnify” another party typically must cover the costs of a lawsuit, claim, or similar expenses (including judgments, settlements, and attorneys’ fees) that arise in connection with the indemnifying party’s conduct under the agreement. The language is often (but not always) aimed at claims and lawsuits brought by third parties. For example, if your organization subleases its facility to another organization to hold an event, you might require the sublessee to indemnify your organization in the event a person gets injured at the event and sues your organization.
In theory, indemnification provides some level of protection against risk to the indemnified party. However, the devil is in the details. Contracts often excuse one side from its indemnification obligations if the other side’s conduct contributed to the circumstances giving rise to the claim, and it is important to be aware of any limits and exceptions in the language. Additionally, indemnification may not actually provide much protection if the indemnifying party does not have the funds to pay and does not maintain insurance that covers these particular liabilities.
Planning Tip – Before finalizing a contract, think carefully about the risks that are inherent in the relationship and how much control your organization has over these risks. Think of the types of lawsuits that could arise and seek advice from your attorney and other advisors. Consult your insurance broker for advice on whether these lawsuits would be covered under your organization’s comprehensive general liability insurance policy (and, if applicable, whether your policy will cover indemnification obligations that apply to your organization under the contract). These inquiries will help you determine whether it is important to insist on indemnification in a particular contract and whether other provisions should be considered, such as a requirement that the other party maintain certain types of insurance at specified levels.
Mutual indemnification language like the kind you described in your question presents other considerations. It is common for indemnification obligations to apply to both parties. On the surface, mutual indemnification can appear to be a fair approach, and this is often suggested in negotiations after one-sided indemnification language has been proposed. However, one party is often at higher risk of getting sued than the other party – usually the party that is more well-known, exposed, and/or has deeper pockets. If the other party is significantly more likely to get sued than your organization, you might be better off deleting indemnification from the contract altogether rather than agreeing to mutual indemnification.
