What is a Contract of Indemnity?
A Contract of Indemnity is an agreement that ‘holds a business or company harmless’ for any burden, loss, or damage. An indemnity agreement also ensures proper compensation is available for such loss or damage. Indemnity usually flows from one party to another. Any contract carries with itself some risk of loss due to any action of the other party. Any act or omission of one party which may be against the terms of an agreement can have negative consequences on the finances of the other party. This may be due to unintentional errors as well. However, it is the right of the aggrieved party to be indemnified against losses that arise due to acts of the other party.
Such acts of indemnity are governed under Indian Contract Act 1872. The purpose is to relieve the liabilities of a party under a contract if they have not breached the contract on their part. Most contracts such as Service Level Agreements, Employment contracts and even website policies have an indemnity clause.
The parties involved in an indemnity agreement:
- The Indemnitee is the one who is protected from any liability. This would be the company.
- The Indemnifier is the one who promises to reimburse the Indemnitee for any claims. This would be the client.
People also refer to a Contract of Indemnity as Hold Harmless Agreement, Indemnification Agreement, Indemnity Agreement, Indemnity Contract, No Fault Agreement, Reparation Agreement, Assumption of Liability Agreement or Agreement to Indemnify
Types of Indemnity
- Broad Indemnification
- The Promisor promises to indemnify the Promisee against the negligence of all parties, including third parties, even if the third party is solely at fault.
- Intermediate Indemnification
- The Promisor promises to indemnify the Promisee against the negligence of the Promisee and the Promisor. The indemnity does not extend to the actions of third parties.
- Limited Indemnification
- The Promisor promises to indemnify the Promisee only against the negligence of the Promisor. The indemnity does not extend to the actions of the Promisee or third parties.
Elements of a Contract of Indemnity
- Indemnitee: the name and address of the person or corporation making the promise to indemnify
- Indemnifier : the name and address of the person or corporation receiving the indemnity
- Activity: the contract or agreement between the parties that might give rise to future losses or damages
- Limitations of Indemnity– identify any limitations on the indemnity, such as only personal injury or death, and any cap limits on the amount of the indemnity
- Notice of Indemnity Claim – the Promisee must tell the Promisor about any claims within a certain amount of days
- Duty to Defend – the Promisor can take control of the defense of the claim, otherwise the Promisee can pursue its own defense and seek reimbursement
FAQs
A person is negligent when he or she does not act with the level of care an ordinary prudent person would under the same circumstances.
No, it is not compulsory. However, Most contracts and agreements have an indemnity clause that covers crucial points of an indemnity agreement.
Indemnity agreements are signed between businesses and customers in case the service involves high risk to the customer.
Hey @HarshitShah
Yes. Any time the terms of the agreement change, this should be documented in a new contract. The new contract should also make clear this contract replaces the old contract.