What Is an Indemnity Agreement?

Contracts between two parties might mean that one of the parties could be held liable for losses or damages from their activities as a party to the agreement. The indemnity agreement is intended to protect the party that might be liable, holding the person harmless from that liability.

Definition and Types of Indemnity Agreements

The term indemnity is compensation given to make someone whole from a loss they have already sustained. In general, it means a duty to make good any loss, damage, or liability incurred by another. Indemnity has the general meaning of "hold harmless;" that is, one party holds the other harmless for some loss or damage. In a contract, indemnity is something voluntarily given as security or protection to prevent suffering any damage.

To indemnify someone is to say that person has no responsibility for damage or loss from a transaction. Indemnity also includes an understanding that an injured party has a right to claim reimbursement or compensation for a loss or damage to the person who has the duty. Indemnification has another meaning as a legal principal in insurance, in which the insurer agrees to compensate the insured person for covered losses.

Alternate names: Hold harmless agreement

Indemnity Agreements and State Laws

Indemnity agreements usually come to court as civil cases in states and states have laws that limit indemnity clauses or agreements. Some states, including New York, prohibit the indemnity agreements in construction contracts, saying they are against public policy and are "void an unenforceable." Even where these clauses are not restricted, courts have held that indemnity clauses must be expressed in "clear and unequivocal terms" (Missouri) or be "very clearly intended" (Nevada).

Some contracts have a clause that says, "To the fullest extent permitted by law, the contractor shall indemnify and hold harmless the owner." If the clause is not allowed, it leaves the rest of the contract valid.

Types of Indemnity Agreements

The most common case of a business that has indemnity agreements is in construction. For example, a business contracts with a builder to install new "high impact" windows in its building in a hurricane-prone area. The builder will usually require the business to sign an indemnity agreement.

Rental car companies, meanwhile, use indemnity agreements to protect against lawsuits from accidents involving rental car drivers.

Businesses that offer somewhat dangerous activities to the public (skiing, para-sailing, amusement park rides) often require that the members of the public sign an indemnity agreement releasing the business from liability in case of an accident.

Kennels often want an indemnity agreement in a contract with a pet owner to keep the kennel from being sued for damage caused by the owner's pet to other pets. In this case, the pet owner is being asked to indemnify the kennel owner (to hold the kennel owner harmless) for damages caused by the pet.

Indemnity clauses are often found in intellectual property licensing agreements.

A landlord may require a tenant to sign a "hold harmless" clause in a rental agreement, agreeing that the landlord is not responsible for damages caused by the tenant's negligence.

Parts of an Indemnity Agreement

The specific form of an indemnity agreement varies by state law and by use. Some contracts are a simple one-page agreement, while others are long and complex. This is a general overview of what you might find in an indemnity agreement. 

The two parties will be named, sometimes with their specific names, sometimes as : 

• The Indemnitee: The person wanting protection.
• The Indemnifier: The person promising (warranting) to minimize harm to the indemnitee.

The indemnity agreement may describe consideration (usually a sum of money) that will be used to secure the agreement. The agreement will state the specific terms under which the indemnitee will be held harmless.  Sometimes, consideration can be approval of the agreement.

The indemnification process will be defined, including, in some cases, the determination of the right to indemnification and who pays expenses of each party.

Exclusions to the agreement will be described. One common exclusion is negligence or fault of the indemnitee. That is, if the indemnitee can be shown to be negligent, the indemnitee is at fault and can be sued.

The agreement will state who has the burden of proof; usually, the indemnifier must prove that the claim is not appropriate.