WHAT TO KNOW ABOUT NEGOTIATING INDEMNIFICATION PROVISIONS
May 10, 2022
Indemnity clauses can exist in many types of agreements or contracts. If you rent a car, the rental agency will put an indemnity clause in your rental agreement, holding you liable for any damages you cause to the vehicle. Indemnity clauses are common in partnership agreements so that the actions of one partner are shielded from the liability of the others.
Indemnity clauses—sometimes referred to as “hold harmless” clauses—are also common in construction projects. For instance, an owner may negotiate an indemnity provision with the contractor, requiring the contractor to indemnify the owner for any losses from the construction work. In turn, the contractor may rely on indemnity clauses with his subcontractors to be indemnified for losses or damages. In fact, most of the court rulings in California regarding indemnity provisions stem from construction cases.
If you’re looking to begin a construction project or enter into any agreement that could result in liability issues for you in or around the Greater San Francisco Bay Area, contact the Law Offices of David H. Schwartz, INC to discuss indemnification.
Attorney David Schwartz has more than 45 years of experience in business litigation and can review any agreement containing an indemnity clause that you’re considering. Likewise, he can defend you if an indemnity clause is leading to legal action against you. The Law Offices of David H. Schwartz, INC proudly serves clients not only in the Greater San Francisco Bay Area, but also in Santa Clara, San Mateo, San Jose, Oakland, and throughout Alameda County.
Indemnity Clauses and Their Use
The entire purpose of an indemnification clause is to protect one party from another’s liabilities. California law states: “Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person.”
Indemnity clauses are used in a variety of circumstances. Company executives will often receive indemnity provisions in their employment agreements, by which the company agrees to hold harmless the employee to the fullest extent allowed under state law. This includes legal actions, claims, demands, judgments, and losses, so long as the employee acts in good faith.
A common use of indemnity clauses is in insurance policies. Essentially, an insurance policy agrees to indemnify the policyholder for any losses or liabilities covered by the policy. Software and service agreements also frequently contain indemnity clauses.
California Classification of Indemnity Clauses
Through case law, California generally recognizes three types of indemnity clauses:
Type I: In this classification, the indemnitor—the person agreeing to provide protection—consents to unequivocally indemnify the other party, known as the indemnitee, for all losses or damages, regardless of who is at fault. There is an exception, however, if the indemnitee’s willful conduct or active negligence caused the loss or damage. In construction contracts, the indemnitee would be the contractor and the subcontractor the indemnitor.
Type II: Also known as the general indemnity clause, Type II limits the indemnitor’s liability to losses caused by the indemnitee’s passive negligence only.
Type III: This type limits the liability of the indemnitor only for losses and damages they cause.
Negotiating an Indemnity Clause
The process of negotiating an indemnity clause can be complex. Many individuals have a poor understanding of what kind of clause would benefit them the most. If you’re the owner or contractor seeking an indemnity clause, Type I is typically the most comprehensive and beneficial, requiring the contractor or subcontractor—the indemnitor—to cover all losses and damages except when the indemnitee’s (your own) willful conduct or active negligence causes the problem. If you’re a contractor or subcontractor subject to an indemnity clause, Type III is the most favorable, as only losses or damages you cause are indemnifiable.
As an example, if you as the owner of a new building hold an indemnity clause with the contractor, and after the building opens, an employee suffers an injury while walking down the staircase because the handrail gives way, you can hold the contractor liable for payment for losses and damages. The contractor can then, in turn, invoke their indemnity clause against the subcontractor who built the staircase.
The Importance of Legal Counsel
Since the three types of indemnity clauses were established by California courts, the distinctions have become somewhat blurred, and following a California Supreme Court decision, the enforceability of indemnity clauses has hinged more on the explicit language used in the agreement. In addition, liability now depends to a large extent on whether any negligence involved was passive or active.
If you want to negotiate an agreement or contract with an indemnity clause in it, you will need the advice and guidance of an experienced attorney. Boilerplate clauses may no longer provide the protection you seek.
Skilled Advocacy You Can Trust
In the Greater San Francisco Bay Area, the Law Offices of David H. Schwartz, INC stands ready to advise and guide you in all your business litigation needs. If you’re facing a dispute or legal action over an indemnity clause, rely on Attorney David H. Schwartz and his 45 years of hands-on experience.