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What is Indemnification?

A business that rents chainsaws cannot be held liable for accidents caused by the tool if they have been indemnified.
Wheelchair makers require that hospitals indemnify them against accidents a patient may have while using their product.
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  • Written By: Michael Pollick
  • Edited By: Niki Foster
  • Last Modified Date: 27 September 2014
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Imagine for a moment that you rent a chainsaw from the local ABC rental company. Since your ability to use a chainsaw safely remains unproven to the ABC rental agent, he may ask you to sign a number of papers. One of those papers might read: "The renter of this equipment agrees to defend, indemnify and hold harmless ABC Rental Company and its staff for any third-party claims which may arise from the use of the equipment." This is considered indemnification, an agreement between two parties not to hold one of them liable for future legal action or fines. Indemnification usually only works in one direction; you as the renter agree not to hold ABC Rental Company employees responsible if you have an accident with their chainsaw.

Indemnification may not seem like a major consideration in most circumstances — the chances are pretty good that you won't be hit by a baseball at a game or suffer damages from faulty rental equipment. But, indemnification can be a very important consideration if you're a director of a medical equipment company, for example. There's always a possibility of a patient suing one of your client hospitals for damages suffered in a fall from one of your wheelchairs. An indemnification agreement with your company means that the hospital agrees to take financial responsibility if a patient prevails in a lawsuit. Without indemnification, you could be held personally liable for damage payments.

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Many times an indemnification clause is invoked in the case of third-party claims. If you rented your chainsaw from ABC Rental Company and signed an indemnification clause, then you essentially agreed to indemnify them. This means if you accidentally used the chainsaw to carve up a neighbor's car, the neighbor could not sue ABC for renting the chainsaw to an incompetent user in the first place. If the neighbor still tried, ABC would expect you to testify in court and aid in their legal defense.

Indemnification clauses usually trump any other legal arguments, so it is important for both parties to understand precisely what actions are covered under the agreement. Some indemnification clauses can be worded too vaguely to be enforced, while other can be very specific about geographical limitations or eligible third-party participants. This is why many companies consult legal counsel before drafting an indemnification agreement for new employees and board members. The legal language must be solid or a company's executives could face major financial ruin from liability claims and lawsuits.

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Discuss this Article

anon180250
Post 14

Then what's the difference between indemnity and indemnification?

anon169225
Post 13

Can you please explain in the simplest way possible what does the following mean:

"The husband shall indemnify the wife and hold her harmless from any and all federal and state income taxes, penalties, and interest arising from or attributable to the parties' joint returns, together with all legal and accounting fees that she may be required to incur in the event of any effort to assess liabilities against her. The provisions hereof shall apply to all joint returns previously or hereafter amended by the parties."

In 2009 my ex-husband and I had to pay 9K in taxes. We got divorced in 2010 and he has been paying the IRS monthly about $600 to pay of the 9K. I filed taxes (as single) this year and i was supposed to get a refund of about $2600 but the IRS took $2200 and put it towards the 9K debt. When I asked my ex to pay the money back he refused stating i need to deal with the IRS directly.

IRS states that i can not file the injured spouse claim because it was "our" debt.

Is there anything I can do to get the money back? Please advise. Thank you.

anon119984
Post 11

If defendant A was sued by the plaintiff after defendant B signed a indemnification agreement, would defendant B be liable for defendant A's liability to the plaintiff?

anon103420
Post 9

I guess the 'renter' is pretty competent if he or she was able to carve a neighbour's car.

anon82574
Post 8

We are a cleaning company and our client requires us to sign the following indemnification. Is this way to vague? Thank you.

The Contractor hereby agrees to defend and indemnify (Client) and its respective partners, shareholders, directors, employees and agents ("Client Indemnified Parties") and hold them harmless from all fines, suits, proceedings, losses, claims, demands or actions of any nature or kind whatsoever ("Claims"), directly or indirectly associated or connected with the performance of the services hereunder and against any and all damages, costs, expenses and fees (including without limitation reasonable attorneys fees) incurred by or on behalf of any of the foregoing in the investigation or defense of any and all such claims. However, it is agreed that Contractor will have no duty to indemnify and hold harmless client indemnified Parties as set forth above for Claims directly or indirectly arising from: (i) the sole negligent or intentional act or omission of an Client Indemnified Party, (ii) the handling or transport of hazardous materials as defined by the DOT tendered by the Client Indemnified Parties, or (iii) product defect, design or manufacturing of Client products.

Client shall notify Contractor in writing of any claims for indemnification pursuant hereto. Contractor shall, in writing, within thirty (30) days after such notice, accept, or reject such obligation of indemnification. In the event that any claims for indemnification or other disputes hereunder cannot be resolved pursuant to the procedures of this Section, such dispute shall be submitted for resolution to the state or federal courts located in the city and state where the Client facility is located.

anon71118
Post 7

I recently had an Artist Contract presented to me that read: Section 10. Indemnification. Artist agrees to indemnify client against all loss or damage that artist may suffer as a result of being engaged by client. In witness whereof, the parties have executed this contract, the date and year first above written.

Is it advisable to sign this contract with this indemnification?

mkahiga1
Post 5

Your comment begs the question. In fact, an indemnity clause is necessary. Just place yourself in a corporations shoes. It will be tough to only do business with companies without disclaimers.

Elegantrose
Post 3

@sagacious 99 -- You are correct in reading that you will be held responsible for someone else's mistakes if you should be sued for the errors/damages incurred by that action. They will be off the hook for the legal bills and you will have to pay for yours and theirs as well.

I had this happen at a Homeowner's association I lived at. We had to defend our HOA and the management company for something the management company did and pay all the bills. After that episode I always make any organization remove that clause or I don't sign. I take my business down the road.

anon4428
Post 2

@sagacious99 -- "I some how read this agreement as saying I'm going to be held responsible for their mistakes."

I don't interpret this clause that way at all. They are stating that if you cause an action through your member account (or permit someone else to do so) that results in a claim being made against any "thisbusiness" party by a 3rd party, that you are responsible for indemnifying the "thisbusiness" party.

sagacious99
Post 1

I substituted thisbusiness for the name of an actual business.

You agree to indemnify, defend and hold thisbusiness and its affiliates, and their respective directors, officers, employees, shareholders, partners and agents (collectively, the "thisbusines's Parties") harmless from and against any and all claims, liability, losses, costs and expenses (including lawyers’ fees on a solicitor and client basis) incurred by any thisbusiness Party in connection with: (i) any use or alleged use of the Site under your Member Name by any person, whether or not authorized by you; (ii) or resulting from any communication made or Content uploaded under your Member Name; or (iii) any breach by you of this Membership Agreement. thisbusiness reserves the right, at your expense, to assume the exclusive defense and control of any matter otherwise subject to indemnification by you, and in such case, you agree to cooperate with thisbusiness's defense of such claim.

I some how read this agreement as saying I'm going to be held responsible for their mistakes.

what gives?

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