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Jul 17

Putting A Limit on Your Obligation To Indemnify

I promised to indemnify you. Here’s a quarter.

You might skip over indemnification provisions when negotiating a contract. You understand what they are. They’re just boilerplate, right? Wrong.

First, boilerplate isn’t “extra stuff.” It’s the opposite. Like the strong metal plate around a boiler designed to contain it and prevent an explosion, boilerplate in an agreement is there to protect the agreement, to help make sure that the deal you think you have is indeed the enforceable deal.

Indemnification provisions are one of the types of risk-shifting provisions generally found in important agreements. For example, in exclusive contracts between medical groups and facilities. Or, even in provider agreements between a medical group and its physicians.

Indemnification provisions can take many forms. Some sophisticated agreements often contain multiple indemnification provisions, each dealing with a different sort of situation.

At its essence, an indemnification provision requires one party, the “indemnitor,” to hold the other party, the “indemnitee,” harmless (i.e., to pay for any damages caused and, perhaps, to defend it and/or to pay its attorneys’ fees) in the event of the indemnitor’s breach of whatever obligation or set of facts is the subject of the provision.

But there’s another, related issue that many parties don’t think to negotiate: What’s the limit of indemnification? Without a specified limit, well, there is no limit.

Although the notion of insurance is similar to indemnification, it is different, certainly in respect of the fact that the insurer isn’t “indemnifying” as to its own acts. Yet, insurance policies have limits to the carrier’s liability. For example, a medical malpractice insurance policy might have a per claim limit of $1 million and an aggregate annual limit of $3 million.

When you’re next negotiating an indemnification provision, at least think about whether you should, and whether you can, think more like an insurer and cap the limits of your liability.

Depending on the type of agreement, the type of indemnification provision, the parties, their relative positions, and whether the indemnification is one-way or mutual, it may or may not be in your interests to pursue a cap.

Just don’t let your decision be made by default, that is, by not thinking about it.

Comment or contact me if you’d like to discuss this post.

Mark F. Weiss

www.advisorylawgroup.com

 

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