What is Indemnity?

Chances are if you’ve signed any type of agreement or contract to lease, rent, buy or sell a home, car, real property or other any good or service, you’ve entered into an indemnity agreement. Indemnity clauses are included in most types of contracts, yet many people who sign contracts don’t understand what indemnity is and how it might affect them. Here’s what you need to know:

FIRST, WHAT IS INDEMNITY?

Black’s Law Dictionary defines an indemnity clause as one that protects against loss or damage, “to give security for the reimbursement of a person in case of an anticipated loss falling upon him.”

So what does that mean? Generally speaking, when one party agrees to take responsibility for damages caused by another party. Let’s say you’re building a shopping center and one of your contractor’s employees damages the property. The contractor, not the employee, is responsible for the damages because he has indemnified his employees.

HOW IS IT USED IN A CONTRACTUAL AGREEMENT?

Indemnity may be either “express” – that is, spelled out within a written contract – or implied. In express contractual indemnity, the obligations of all parties are clearly spelled out within the contract’s terms. In most cases, these obligations take the form of a separate clause or provision, and the level of indemnity can vary significantly.

In implied indemnity, there is either no contract or there is a contract which does not include a provision for indemnity; however, indemnity is implied. One common example of implied indemnity occurs when one party asks another individual to act on his or her behalf, and that individual incurs loss or damage through no fault of his own.

There is also a third type of indemnity called common law indemnity which arises most commonly in multi-party cases, where one party attempts to pass the responsibility for loss on to another party. A common example is when a construction defect causes damage, injury or loss and the general contractor is sued. That contractor in turn may try to pass liability through to the subcontractors.

HOW DO ARIZONA COURTS VIEW INDEMNITY CASES?

In contractual or “specific” indemnity, when the terms require the indemnitor to provide protection (or indemnify) the indemnitee regardless of his or her negligence, the indemnitor must indemnify the indemnitee. The only exception is when the indemnitee is determined to be 100% responsible.

In Arizona, implied indemnity cases are all or nothing; that is, if the court finds that the indemnitee is responsible to any degree, the indemnitor is released from any duty to indemnify.

As you can see, indemnity can be a complex issue, and one which can have different implications for different types of businesses. The best course of action is to consult with a business attorney before signing any type of business contract to ensure you fully understand the implications of the indemnity clauses in your contract.