Why Indemnity Agreements Aren’t Ironclad
March 6, 2023
Risk leaders are on a never-ending mission to ensure their company’s safety, compliance, and potential damage are at a minimum.
Historically, the company requesting verification of a vendor’s insurance coverage — would rely on indemnity agreements to reduce any associated risks from the partnership.
But the truth is, that an indemnity clause isn’t foolproof. And in many cases, depending on local state regulations, it might be completely irrelevant.
Your best defense is a strong offense. Requiring and verifying COIs dramatically reduces your company’s exposure to lawsuits and other repercussions. If you aren’t sure whether or not your company is properly protected, then consider this a refresher course.
Legal Disclaimer: While this document is accurate to the best of our knowledge, it’s not intended as legal advice.
Indemnity agreements are not always enforceable, and the amount of protection that they offer may vary depending on the applicable laws of the jurisdiction in which they are created or enforced.
Consult with an attorney to determine whether an indemnity agreement is right for your situation and what liabilities you hold if you sign one.
What is an Indemnity Agreement?
An indemnity agreement is a simple contract that essentially protects one party of the agreement from repercussions should the other party engage in behavior that creates a liability.
In other words, if you (the company) contract a vendor to perform work on your premises, and they create damage or injure your customers in the process, the agreement would hold the vendor solely liable for any damages and shield your company from legal action.
While you can have a full indemnity agreement that’s separate from your primary vendor contract, many companies prefer to simply incorporate an indemnity clause into the primary contract instead.
Types of Indemnity Agreements
Indemnity agreements or clauses often go by a variety of names. Common alternatives include:
- Hold harmless agreement
- No-fault agreement
- Release of liability
- Waiver of liability
However, there are a few common forms of indemnity. Knowing your options as well as which one applies best to your scenario can help you make an informed decision.
With this type of indemnity, the agreement explicitly states how each party could be held liable and the scenarios that would trigger the clause. In short, this type of agreement avoids vagueness so both parties are fully aware of their respective liabilities.
Implied indemnity can be murky. Unlike express indemnity that explicitly states in what manner either party is liable, with this version it depends on the circumstances. For example, assume that a vendor provides a service at the company’s offices and is injured.
However, the vendor can prove that negligence on the part of the company (such as failing to mop up a liquid spill) led to the injury. The company would potentially be liable not just for the injuries but possibly even for monetary losses the vendor accrues because of time spent out of work while recovering from the injury.
When Do You Need an Indemnity Agreement?
Indemnity can cover a wide range of scenarios and isn’t limited to physical goods or on-site service providers. In short, any time a company intends to outsource work to a vendor or service provider, an indemnity clause is a good idea.
Hiring a Third Party to Provide a Service
Anytime a company contracts a third-party vendor, indemnity clauses should be added to the service contract. This doesn’t just have to be when hiring a remodeling contractor or audio/visual installer.
For example, a company that contracts executive service firms like recruiters could require an indemnity clause to prevent legal repercussions if the recruiter violates federally mandated hiring practices while sourcing applicants on the company’s behalf.
Allowing a Third-Party to Use Your Property or Equipment
The last thing you want is for a vendor to use your corporate property, damage it, and walk away as if nothing happened. An indemnity clause would require them to either repair or replace the damaged items. Without this, your company would be left footing the bill for that problem.
Providing High-Risk Services
Maybe your company engages in services that are deemed high-risk. Depending on the industry this can vary.
However, anything from offering dating services to gambling, and even approved multi-level marketing (MLM) products can all get a business labeled as high risk. If your company — or its vendors — are engaged in such activities then you might want to incorporate an indemnity clause.
Permitting High-Risk Activities on Your Property
For instance, your company is an activity center and you feature a go-cart station, an indoor skydiving station, and a rock climbing wall. By default, there’s a legitimate risk of injury associated with these activities — so you need an indemnity clause.
Why Indemnity Agreements Don’t Protect You from Everything — You Still Need COIs!
Although indemnity agreements are a great starting point, they often don’t fully protect you from the financial fallout of litigation. This is especially true when repercussions include the financial losses associated with physical or virtual damages that have accrued.
In this scenario, a COI can give you the peace of mind that you need. A COI is a short-form document that outlines the insured’s full coverage. Now you can require your insureds to hold a minimum dollar value of coverage and protection.
For example, assume you’re a retailer that contracts a clothing brand to provide garments for your stores.
A customer purchases one of the garments and breaks out in hives. Causing them to sue your store for damages — both related to medical expenses and pain and suffering. Even though your company didn’t make the clothing, the consumer only knows that they bought the garment from you.
However, a vendor’s COI with bodily injury coverage would protect your business against repercussions. Meaning you wouldn’t have to bare sole financially liable for any damages sought.
Cautionary Tales from Indemnity Agreements
Indemnity agreements aren’t ironclad. While they can make a firm feel secure, they don’t always provide the financial protections that a COI can offer. However, for COIs to be effective, accuracy is key.
A good automated certificate of insurance management system helps ensure policies are not expired and an insured’s coverage meets your business’ minimum requirements. An out-of-the-box service like Evident can help you streamline insurance compliance and provide added peace of mind.