Business & Corporate Articles


Considerations for Tailoring Indemnity Agreements

Indemnity agreements play important risk-shifting functions in many types of contractual relationships. They also often play a determinative role in business litigation. Consequently, when tailoring these clauses, careful thought should be given to the meaning ascribed to terms commonly utilized within them, the manner in which courts interpret these clauses, and statutory limitations on the breadth of these clauses so that the practitioner may protect the client to the greatest extent possible without suffering the consequences of overreaching.

Damages v. Liabilities

Consider, for instance, when the indemnitor’s obligation is triggered. A duty to indemnify for “damages,” “demands,” “costs” and/or “losses” may not be payable until the indemnitee suffers actual loss1 while a duty to indemnify for “liabilities” arises as soon as the indemnitee becomes obligated.2 Consequently, adding the term “liabilities” to your clause may broaden or at least hasten an indemnitor’s obligations and have a corresponding effect on triggering the statute of limitations for their breach.

Duty to Defend

While often included in an indemnity clause, a duty to defend is distinct from a duty to indemnify. The duty to defend requires the indemnitor to defend or fund the defense of a covered claim from its inception.3 The decision to include a duty to defend in an indemnity clause should prompt further questions from the drafter such as how the indemnitor is to be put on notice of a claim and to what extent the indemnitee will maintain control of that defense.

Hold Harmless

“Hold harmless” is another term often added to indemnity clauses that warrants attention for the inconsistent matter by which it has been interpreted. Some courts have held that “indemnify” and “hold harmless” are synonymous.4 A recent decision has held that the term “hold harmless” acts only as an exculpatory provision that releases the indemnitee from liability to the indemnitor.5 Still another court has held that both “indemnify” and “hold harmless” contemplate third-party actions, but serve distinct purposes. “One is offensive and the other is defensive … ‘Indemnify’ is an offensive right – a sword – allowing an indemnitee to seek indemnification. ‘Hold harmless’ is defensive: The right not to be bothered by the other [contracting] party itself seeking indemnification.”6 A cautious drafter may wish to consider the various ways in which “Hold harmless” has been interpreted and ensure that the language of the contemplated agreement clearly reflects the intent of the parties.

Prohibitions and Limitations

In addition to understanding the effect of including specialized terms in indemnity clauses, drafters should be familiar with the prohibitions and limitations affecting their enforcement. As an initial matter, contracts that purport to indemnify for fraud, willful injury, or willful or negligent violation of law are against public policy and, consequently, void.

While generally, indemnity contracts for negligence are enforceable, the strict rule of construction in California is that indemnity for active negligence requires explicit language in the clause that negligence of the indemnitee is to be included. Such provisions have been referred to as Type I indemnity clauses and are strictly construed against the indemnitee. If the indemnity provision does not specifically provide for negligence of the indemnitee, it is still interpreted as including indemnity for “passive negligence,” such as failure to discover a dangerous condition, and is commonly known as a “general indemnity”7 or Type II clause. Lastly, a Type III indemnity clause requires the indemnitor to indemnify only for losses caused by the indemnitor. 

As a final note, California has a myriad of anti-indemnity laws applicable to construction contracts and drafters of such should become familiar with them. Some of the more common restrictions include: 

  • No Indemnity for Sole Negligence or Willful Misconduct 8
  • No Indemnity for Public Agencies for Active Negligence 9
  • No Indemnity by Private Builder Not Acting as Contractor 10
  • No Indemnity for Builder or General Contractor Negligent for Defects in Design 11
  • Limitations on Indemnity for Public Agencies by Design Professionals 12
  • Limitations on Indemnity in Wrap-Up Insurance Policies 13

These and other prohibitions have been amended relatively recently and attorneys should update older contracts to ensure that offending provisions are appropriately modified to avoid the chance of having an overly-broad clause stricken in litigation.

Conclusion

If a business dispute should arise between contracting parties, the effect of their indemnity provisions will likely be disputed. However, careful drafting of indemnity clauses consistent with the current limitations on their enforcement can help to ensure the client’s expectations are met and their interests are protected to the greatest extent possible.

-- Douglas Field


1 Cal. Civ. Code §27782(2).

2 Cal. Civ. Code §2778 (1), (2); Gribaldo v. Agrippina Verischerunges A.G., 3 Cal.3d 434 (1970)..

3 E.g. Crawford v. Weather Shield Mfg., Inc., 44 Cal. 4th 541, 553-54 (2008); Cal. Civ. Code §2778 (4).

4 E.g., Medcom Holding Co. v. Baxter Travenol Lab., Inc., 200 F.3d 518, 519 (7th Cir. 1999); See generally Majkowski v. American Imaging Mgmt. Servs., LLC, 913 A.2d 572, 588 (Del. Ch. 2006).

5 See generally Rooz v. Kimmel, 55 Cal.App.4th 573, 582 (1997).

6 Queen Villas Homeowners Assn. v. TCB Prop. Mgmt., 149 Cal.App.4th 1, 9 (2007).

7 E.g., E.L. White, Inc. v. Huntington Beach21 Cal.3d 497, 507 (1978); Rossomor Sanitation, Inc. v. Pylon, Inc., 13 Cal.3d 622, 629 (1975). 

8 Cal. Civ. Code §2782(a).

9 Cal. Civ. Code § 2782(b).

10 Cal. Civ. Code § 2782(c).

11 Cal. Civ. Code § 2782(d).

12 Cal. Civ. Code § 2782.8.

13 Cal. Civ. Code §2782.9 - 2782.96.

This article is for information purposes and does not contain or convey legal advice. The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting with a lawyer.