What is an indemnity clause in a contract?
Indemnification clauses are clauses in contracts that set out to protect one party from liability if a third-party or third entity is harmed in any way. It’s a clause that contractually obligates one party to compensate another party for losses or damages that have occurred or could occur in the future.
Can a government entity indemnify?
A government agency may not indemnify its contractors for claims brought against them by reason of their own negligence. Nor may the United States agree in advance to assume liability for the negligence of its employees for which it may not otherwise be responsible under the Federal Tort Claims Act.
Are indemnity clauses necessary?
The most important part of an indemnification clause is that it protects the indemnified party from lawsuits filed by third parties. This protection is important because damaged parties are still able to pursue compensation for their losses even if this clause isn’t in the contract.
What is government indemnification?
Indemnification provisions allocate the risk of lawsuit or compensation for damage to one party in a contract in exchange for compensation either in the form of other beneficial contract terms or financial compensation.
Is there a duty to mitigate under indemnity?
There’s no obligation to mitigate loss: If a claim under an indemnity is a debt claim, it’s clear that there’s no obligation on the party benefitting from the indemnity to mitigate its loss (though there would probably be good commercial reasons for doing so).
Are indemnities capped?
Courts may see indemnities as money paid, and therefore a debt. It can be difficult to avoid this. It comes down to the fact that indemnities are paid out quicker, as opposed to liability claims, so it’s important to specify that your both your liability and indemnities are capped.
What is the difference between indemnification and limitation of liability?
In general, insurance transfers risk from the contracting parties to a third party—an insurance company. Indemnification usually transfers risk between the parties to the contract. Limitation of liability prevents or limits the transfer of risk between the parties.
How do you limit an indemnity clause?
You should look to limit indemnification clauses by narrowing their scope, putting in caps on damages, and clearly defining the indemnifiable acts (i.e. the representations and warranties in the example above). Also consider purchasing insurance as a means to limit your financial risk.