What is an Indemnification Clause?

Black’s Law Dictionary, Sixth Edition provides that to indemnify is to restore the victim of a loss, in whole or in part, by payment, repair, or replacement. This indemnity would be set forth in a contract which contains an indemnification clause. Indemnification clauses are also referred to as Hold Harmless clauses because they save the indemnitee from harm by securing them against loss or damage. These are a mainstay of corporate transactions and are commonly seen for example in commercial lease agreements and insurance contracts.

A simple indemnification clause might provide that if any legal proceedings shall be instituted or any claim asserted by any third party, the indemnitee shall give the indemnitor prompt written notice. The indemnitor shall then be entitled to assume the defense of any action, suit or claim brought against the indemnitee with respect to which the indemnitor may have indemnity liability thereunder. The indemnitor shall also be responsible for legal or other expenses incurred in connection with the defense thereof. The parties agree to cooperate fully with each other in connection with the defense, negotiation or settlement of any such proceeding or claim. Each party, without cost to the other party, shall make available to the other party and their attorneys and accountants all books and records of such party relating to such proceeding or litigation.

One should also consider using language that not only provides indemnity against loss already sustained, but also provides indemnity against loss at the time the liability arises. Indemnity against loss at the time the liability arises versus after the loss has already been sustained, is appropriate since the claim for indemnity arises upon the obligor indemnitor’s default.I was called recently to reconsider indemnification clauses. A recent issue that came up in regards to a case involved a collection agency collecting a debt on behalf of a company. The company had entered into a contract with the collection agency to collect debt owed to the creditor. The collection agency with its individual debt collectors acted as the company’s agent having been authorized either expressly or impliedly to act on behalf of the company to collect the debt owed. The collector was agent and the company creditor was the principal. The collection agency was what I refer to as a rogue collection agency completely disregarding federal and state law to carry out its assignment. The collection agency collectors harassed the debtor by inundating her with telephone calls to her employer, even after she and the employer told them that was not permissible. They threatened to arrive at her work to collect the debt by a certain hour that same day. They told her that if she did not come up with the money by a certain hour that same day, then “bad” things were going to happen to her. They fraudulently represented themselves as lawyers.

There are certain situations in which a principal can be liable for the acts of the agent. One such situation involves selection of the agent. If the principal hires an agent with knowledge of his incompetence, he will be liable for the agent’s negligence. Furthermore, if he negligently selects the agent, he will be liable for the agent’s negligence. A principal is not usually liable for intentional torts, however, if the principal selected an agent and research should have known that the agent would intentionally commit torts on his behalf, then he could face liability. Also, if the torts are carried out in pursuit of the principal’s interests, then the principal could face liability. In the collection agency case, a simple internet search of the collection agency’s name revealed that the collection agency was being sued by the attorney general for Illinois who had procured a restraining order preventing the collection agency from practicing in the state. Furthermore, the name of the rogue agency is littered about the internet on websites describing the outrageous practices. In such a situation, the company creditor protected with an appropriate indemnification clause would be protected from the potential liability.

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