An indemnity agreement can either exist as part of a larger agreement or stand alone as a contract itself. The basic definition of indemnity is “hold harmless”; this means that when an indemnity agreement is in place, the signer of the agreement agrees to hold harmless (or not hold responsible) the named party in the agreement.

Indemnity agreements are commonly added onto agreements when a business chooses to deal with a third party, such as an independent contractor, vendor or external manufacturer. By having an indemnity agreement in place, the business cannot be held liable for any accidents or damages that occur that aren’t their fault.

When’s the Right Time for Indemnity

There are two general instances when an indemnity agreement is used; in one, you are the person or business protected, and in the other, an outside person, party or business is protected.

1. You require a third party to sign an indemnity agreement

In this scenario, you may be working with a contractor, client or another business. By having them sign an indemnity agreement, you and your business will not be held liable if they cause an accident in the course of your working relationship.

2. A third party requires you to sign an indemnity agreement

In this case, you would sign the indemnity agreement, absolving the third party of any liability in the case of an accident you or your business may cause. While doing this may seem counterintuitive, sometimes agreeing to include an indemnity agreement can ease a potential partner’s mind and give them incentive to work with you or your company. It is basically a guarantee that they will not suffer if you mess up.

Other Cases for Indemnity

Indemnity agreements are very common in a variety of professions.

Medical Doctors: It’s important for doctors to have indemnity insurance because treating a patient, especially in a hospital setting, is not a solitary pursuit. For doctors, indemnity insurance enables them to be better prepared to settle any lawsuits from patients who may seek reparations for an illness or additional injury that occurred while they were in the doctor’s care.

Construction: Often, contractors will hire a variety of different subcontractors to complete work on a construction site. It is very important for these contractors to have each subcontractor sign an indemnity agreement that absolves the contractor of any liability if an accident occurs in which the subcontractor is at fault.

High-Risk Pursuits: Almost all consumer businesses that deal with high customer risk (e.g. skydiving, bungee jumping, etc.) require that customers sign an indemnity agreement before completing the activity. This allows the facilitator of the activity to avoid any unwanted repercussions that customer may suffer as a result of their own actions. For example, if someone jumps out of a plane and later has an anxiety attack, they would not be able to sue the company for damages.

Business Consulting or Contracting: When working with clients, especially in a consulting capacity, it is a good idea to have them sign an indemnity agreement that absolves you of liability. For example, if you are a public relations consultant, it is very important you have an indemnity agreement in place, as the company you’re consulting with could sue you for any “bad press” or unwanted attention while you are employed. In some cases, you may be at fault, but if the CEO of the company is caught in the midst of legal activity while you’re working with them, you can’t be held responsible for the repercussions of the outcome.

When Indemnity Doesn’t Protect You

The greatest instance of an indemnity agreement not protecting you is if you are, in fact, liable for the alleged damages. For instance, in the case of the skydiving company, if the customer signs an indemnity agreement, but some type of negligence on your part causes damage or loss, you can still be held responsible.

This makes outlining the specifics of your responsibility and the other party’s responsibility in the agreement of great importance. Most indemnity agreements are based on a fairly standard template. It is also a good idea to consult with a personal injury lawyer or other legal expert who can read through your indemnity agreement and ensure the wording is correct. For another form of protection from liability, especially for risky and physically dangerous activities, consider using a waiver.

Doing business is a risky venture, and it is critical that you protect yourself and others from repercussions that could have a significant financial and reputation-based impact. In most cases, an indemnity agreement is a key piece of the puzzle that may protect you and others.