Legal Definitions - indemnity clause

An indemnity clause is a specific section within a contract where one party agrees to protect the other party from financial loss or legal responsibility. This means if the protected party suffers harm, damage, or is sued by a third party because of something related to the contract, the indemnifying party will cover the costs, such as legal fees, judgments, or settlements. It essentially shifts the risk of certain future liabilities from one party to another.

This type of clause is also sometimes called a hold-harmless clause or a save-harmless clause.

Here are a few examples to illustrate how an indemnity clause works:

• Software Development Agreement: Imagine a small business hires a software development firm to create a custom mobile application. The contract includes an indemnity clause stating that the software firm will indemnify the business if the business is sued for intellectual property infringement because the firm used copyrighted code without permission in the application. If a third party sues the business for copyright violation, the software firm would be responsible for the legal costs and any damages awarded.

  This illustrates the term because the software firm (the indemnifying party) agrees to protect the business (the indemnified party) from specific legal and financial liabilities (intellectual property lawsuits) that arise directly from the firm's work.

• Event Venue Rental: A community center rents out its main hall for a large wedding reception. The rental agreement contains an indemnity clause where the wedding hosts agree to indemnify the community center for any injuries sustained by guests during the event due to the hosts' negligence, such as a poorly secured decoration falling and injuring someone. If a guest sues the community center for such an injury, the wedding hosts would be obligated to cover the center's defense costs and any resulting settlement or judgment.

  This demonstrates the term as the wedding hosts (the indemnifying party) take on the responsibility to protect the community center (the indemnified party) from potential liability (guest injuries due to negligence) that occurs during their use of the rented space.

• Construction Subcontract: A general contractor hires an electrical subcontractor for a commercial building project. Their agreement includes an indemnity clause where the electrical subcontractor agrees to indemnify the general contractor for any damages or lawsuits arising directly from the subcontractor's faulty wiring or unsafe work practices. If a fire breaks out due to the subcontractor's defective electrical work, and the building owner sues the general contractor, the subcontractor would be financially responsible for the general contractor's legal expenses and any damages paid to the owner.

  This shows an indemnity clause in action because the electrical subcontractor (the indemnifying party) commits to shielding the general contractor (the indemnified party) from financial and legal consequences (damages, lawsuits) that are a direct result of the subcontractor's specific work.