“If we get sued, you get sued!” Sounds warm and comforting, right? I bet you cannot wait to partner or contract with a company that already has litigation on its mind. Nevertheless, these types of statements are common, and once formalized by lawyers, are called “indemnification clauses.” They are often necessary but can be very broad and potentially catastrophic to your business.
An indemnification provision is an example of contractual risk transfer. It results in one party to a contract agreeing to indemnify (reimburse or pay) another party (and usually that party’s owners, agents, employees, partners, and maybe even their pets) under certain circumstances. Most indemnification provisions also include a duty to defend, meaning not only are you agreeing to pay for a loss that occurs, but also you are paying for that party to defend against the claim (and even pay the other party to sue you). A third facet is that an indemnification will often require you to “hold harmless” the other party. Forgetting the grammatical nightmare that that language brings, this third facet acts like a release, indicating that you cannot place blame on the other party.
Indemnification provisions are standard in most contracts and typically not removed. I was recently reviewing an indemnity provision in a client’s contract for purposes of risk management guidance. It was a particularly broad provision that shifted all liability to the client. For everything. Forever. Of particular interest in this contract was that the client was going to be responsible for any “misuse, loss, or breach of security as it relates to data” of the other party.
If you are the party in a contract being asked to indemnify another party, we recommend consulting and attorney to ensure your business is properly advised. To better protect your company and reduce your exposure, you will want to consider requesting the following:
This is only a starting point as you review the indemnity provisions in your agreement you are asked to sign. With any contract, the terms and conditions will be entirely dependent upon the tone of the negotiations, the relationship of the parties, and the bargaining power of your organization. From there, you will have to determine what is most important for your business needs and risk exposure.
Since what you don’t know really can hurt you, join us on May 25, 2021 for our webinar on managing risk through contract language. This will cover critical liability issues for contracts you sign and, since you may not know what is in your own agreement, ones you use for your organization.
Heather offers practical guidance and helps employers find solutions to employment law and compliance matters.
Heather educates and advises employers on all aspects of employment law, including compliance with state and federal laws, leaves of absence, discrimination, harassment, accommodations, discipline and discharge, wage and hour obligations, unfair competition, and other issues that arise in the workplace. In addition to Heather’s employment counseling, her background includes nearly a decade of litigation experience. Her prior experience includes litigating for a regional insurance company, business disputes, and employment.
Enterprise risk management (ERM) is a holistic approach to understanding and managing risk throughout an organization.
To develop an effective ERM program, organizations must first identify their risks, assess their current situation and come up with solutions. Those solutions must then be integrated throughout the organization, because controlling risks in one department won't protect the business if another area is vulnerable.
Enterprise risk management (ERM) is a holistic approach to understanding and managing risk throughout an organization. Almost any business, but especially those that have the potential for large losses, can benefit from ERM.
The terminology — enterprise risk management — is designed to emphasize the need for a coordinated effort to address all types of risks. Essentially, all of a company’s risks fall into one or more categories:
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