In today’s business world, contracts are everywhere—from vendor agreements to leases. Yet, one overlooked section can pose significant risks: indemnity and insurance clauses. This article explores how businesses can use these clauses to protect themselves from unexpected liabilities and why careful drafting is essential.

It makes good business sense to enter contracts carefully, ensuring each aspect of the contract accurately details responsibility, deliverability, and cost. While businesses rightfully scrutinize the commercial terms of a contract before signing, the indemnity and insurance sections of the contract are often overlooked and left with boilerplate language. The reality is reviewing these clauses is just as important, as relying on ‘standard’ language can create unexpected exposure to liability.

In simple terms, an indemnity clause allows one party (the ‘indemnitee’) to seek reimbursement (‘indemnity’) for physical or financial harm from the other party (the ‘indemnitor’).

For example, imagine a property owner leases their space to a tenant who runs a business at the site. During the lease, a customer of the tenant’s business falls, injures herself, and sues the property owner for damages. A well-drafted indemnity clause in the lease can provide a contractual mechanism for the property owner to transfer legal and financial obligations associated with the lawsuit to the tenant. If the indemnity clause is not tailored to align with the circumstances of the lease, the property owner may not have the protection they believed they had when they entered the lease. In this scenario, the property owner may end up being responsible for the cost of defending and resolving the lawsuit resulting from the customer’s fall.

Pairing an indemnity clause with an obligation that the indemnitor provides insurance coverage to meet the indemnity obligations is another layer of protection that businesses should consider when entering a contract. When the indemnitor is required to carry insurance to cover an indemnity obligation, the indemnitee has the ability to look to the insurer to address claims that are covered by the indemnity clause. 

Like any contract term, indemnity and insurance clauses are negotiable and should never be viewed as ‘take it or leave it.’ Just as every agreement is customized, indemnity and insurance clauses should be tailored to the circumstances of the contract at issue.

Indemnity and insurance clauses are crucial tools for managing risk in contracts. While precautions should be taken with all new contracts, businesses should also review existing standard form contracts to make sure they contain appropriate indemnity and insurance protection.

Before signing, consult a legal professional to ensure these clauses are tailored to your business’s needs. Additionally, take time to review and update standard contracts to confirm they provide sufficient protection against potential liabilities.

Taking these proactive steps can help protect your business from unforeseen legal and financial exposure.

For questions on this important topic, please contact Nick Laybourn ([email protected]) at HunterMaclean.