Also called waivers of liability, indemnity agreements must be drafted carefully to ensure they offer the intended level of protection. We cover the basics.
As part of every operating agreement, a board of directors must include an indemnity agreement, which protects the board from risks or liabilities created by the partner. Indemnity agreements are also needed for business transactions, employment contracts, rental agreements, construction contracts, and other situations where one party wishes to be indemnified against any losses incurred by the other party.
If you’re facing any of these situations, it’s important to understand what an indemnity agreement entails before entering into one, to ensure your rights are protected.
This article will discuss what an indemnity agreement is and provide a step-by-step guide on how to write an effective indemnity agreement. It also highlights the aspects that make OnBoard a powerful tool for managing indemnity agreements and board meetings.
What is an Indemnity Agreement?
An indemnity agreement is a contract between two parties in which one party agrees to reimburse the other for any losses or damages that may occur as a result of their actions. The agreement may also include provisions for reimbursement of legal fees and costs incurred in defending against any claims or class action suits.
Indemnity agreements are typically used when two parties enter into a business relationship and need to protect each other from any potential financial losses or liabilities. For example, a business may enter into an indemnity agreement with its supplier to protect itself from any losses that may be incurred if the supplier fails to deliver the goods or services promised.
Most organizations use indemnity agreements to protect board directors from personal liability in case of financial or legal issues. No matter the context, indemnity agreements are an important part of doing business and should be taken seriously.
If you are considering entering into an indemnity agreement, make sure you understand the terms of the agreement and any potential ramifications. Additionally, it’s important to consult with a lawyer to ensure that the agreement is legally binding and provides the necessary protections.
How to Write an Indemnity Agreement
An indemnity agreement has two parties:
- Indemnitor: The party that holds another harmless in a contract
- Indemnitee: The party that is protected by the indemnitor against liabilities
Writing an indemnity agreement depends on whether you are the indemnitee or the indemnitor. As the indemnitee, you want a deal that protects you against all legally enforceable liabilities. If you are the indemnitor, ensure the agreement holds you liable only for breach of contract and negligence acts.
Use the following 7 steps to write an effective and legally binding indemnity agreement.
1. Consider the Indemnity Laws in Your Area
Indemnity laws define how much risk can be transferred between parties in a contract. You should consider this when identifying the state statutes to govern your indemnity agreement.
Indemnity laws vary by state. For example, in some states, a clause in an indemnity agreement may be considered void if it fails to meet certain requirements. Some states even have anti-indemnity statutes.
Taking the time to consider the relevant indemnity laws in your area ensures your indemnity agreement is properly structured and offers adequate protection to both parties.
2. Draft the Indemnification Clause
The indemnification clause is the heart of an indemnity agreement. In this clause, you state the liabilities the indemnitee will be protected against. Ensure the wording is precise and only open to one interpretation (unambiguous), especially if your organization is the protected party in the agreement. Ambiguity in a contract is usually resolved in favor of the indemnitor.
The clause should outline that the indemnifying party agrees to defend and hold the indemnitee harmless in particular circumstances.
3. Outline the Indemnification Period and Scope of Coverage
Outlining the indemnification period and scope of coverage is an essential part of this process. The indemnification period is the duration in which the agreement will protect the indemnitee from claims and legal actions. This period can be defined as a specific length of time, such as five years, or it can be indefinite. Again, it’s important to be specific in your definition of the indemnification period.
The scope of coverage refers to the circumstances under which the indemnification clause will apply. As the party providing liability protection in the agreement, ensure you only take on liabilities caused by your organization’s actions.
4. State the Indemnification Exceptions
This section specifies conditions under which the indemnitor will not protect the indemnitee. These conditions vary depending on the agreement’s nature. However, most indemnity agreements outline that the indemnitee will not be indemnified if:
- The party knowingly commits a crime
- The indemnitee acts unreasonably or in bad faith
- The indemnified benefited from the risk that occurred
- The indemnitee gets fully compensated by other legal means
These are just a few examples of indemnification exceptions. Brainstorm others that are specific to your circumstances.
5. Specify How the Indemnitee Notifies the Indemnitor About Claims
An indemnity agreement should reveal how the indemnitee will notify the indemnitor of a dispute or claim covered under the legal document. That way, the indemnified party won’t be in the dark when facing losses, damages, or legal issues. You should also outline how the indemnitor defends the indemnified party against the claims, ensuring the agreement is comprehensive.
6. Write the Settlement and Consent Clause
This clause outlines how both parties in an indemnity agreement must get each other’s consent before settling a claim covered in the contract. The clause ensures the indemnitor doesn’t settle allegations in a way that imposes a penalty or limitation on the indemnified without written consent. It also ensures neither party unreasonably delays consent to the proposed settlement.
7. Outline How to Enforce the Agreement
It’s important to make sure that the agreement is enforceable in case something goes wrong. Therefore, the indemnity agreement should include a specific process for handling disputes and resolving disagreements. This process should be clear and easy to understand, so both parties know what to expect when issues arise.
Indemnity Agreement Example
Indemnity agreements can be complex and costly to draft. Fortunately, some sites provide free templates you can customize to meet your needs, such as specifying the type of liability that the agreement covers, the type of damages that can be recovered, and the parties involved in the agreement. The templates can also be adjusted to include additional clauses and provisions to ensure all parties are adequately protected.
Using these sites is a great way to save money when creating an indemnity agreement, as you don’t have to pay a lawyer to draft the document. Rocket Lawyer provides a free three-step indemnity agreement builder.
How to Manage an Indemnity Agreement With OnBoard
Most construction, service, and commercial contracts use an indemnity agreement. For large companies, the paperwork can quickly amount to hundreds of agreements to manage. For an organization to successfully create and manage them, it needs powerful software that helps in the following ways:
- Create indemnity agreements faster
- Analyze and discuss indemnity contracts more collaboratively with stakeholders
- Store the indemnity documents in a secure, central location for easier management
OnBoard offers a robust software solution to simplify writing an indemnity agreement. Here’s how:
Quickly draft indemnity agreements: OnBoard’s workflows help create indemnity agreement templates for different transactions, which you can reuse in the future. Not only will you save time, but you will also write agreements that comply with your organization’s standards.
Collaborate seamlessly: Creating an accurate and comprehensive indemnity agreement requires effective discussions and collaboration among stakeholders. OnBoard provides a unified platform where different parties can meet. It’s packed with powerful features that enhance communication for a more streamlined and faster decision-making process.
Store, manage, and distribute indemnity agreements in a unified platform: OnBoard provides a secure platform to keep indemnity agreements and access them anytime. Other documents and contracts you can store on our platform include:
Getting Started With OnBoard
OnBoard is a cloud-based board management platform that makes it easy to manage all aspects of board meetings and activities. From meeting scheduling and attendance tracking to agenda creation and document-sharing, OnBoard comes equipped with all the features necessary to manage and optimize board activities.
The intuitive platform offers an abundance of customization options, allowing boards to tailor it to their specific needs. In addition, OnBoard provides robust security and compliance measures. From data encryption to two-factor authentication, OnBoard ensures your board’s data and other confidential information is always secure.
Looking for board management software to streamline board business for your organization? Check out our free Board Management Software Buyer’s Guide.
Frequently Asked Questions
1. What Is the Purpose of an Indemnity Agreement?
The purpose of indemnity agreements is to protect a party from legal responsibility associated with a contracting party's carelessness or negligence.
2. Is the Indemnity Agreement Legally Binding?
Yes. An indemnity agreement is a legally binding contract between two or more parties that outlines the rights and responsibilities of each party in the event of a dispute.
3. Who Pays the Indemnity?
The indemnitor pays the indemnitee for losses and damages covered under the indemnity agreement.
About The Author
- Adam Wire is a Content Marketing Manager at OnBoard who joined the company in 2021. A Ball State University graduate, Adam worked in various content marketing roles at Angi, USA Football, and Adult & Child Health following a 12-year career in newspapers. His favorite part of the job is problem-solving and helping teammates achieve their goals. He lives in Indianapolis with his wife and two dogs. He’s an avid sports fan and foodie who also enjoys lawn and yard work and running.
- Board Management SoftwareNovember 16, 202310 Action Items to Reduce Remote Work Security Risks
- Board Management SoftwareNovember 13, 2023Vision Statement vs. Mission Statement: What’s the Difference? (Explained)
- Board Management SoftwareOctober 27, 2023How to Prepare an LLC Annual Report (Step-by-Step)
- Board Management SoftwareOctober 25, 2023What is a 501c3 Determination Letter? (Overview, Definition, and Examples)