How to Draft an Indemnity Agreement

Setting Up Your Agreement

Search for samples. You may be able to find a sample online that you can use as a guide for your own indemnity agreement. Many legal service companies also offer forms or templates to create an indemnity agreement, although you typically must pay a fee to access them. Samples used by other companies also may help you decide how to word your clauses, or give you an idea of what kind of information you need to include. Make sure any agreements you look at deal with situations similar to yours. Indemnity agreements are used for many different purposes, and one written for one reason may not work for another. If you think you're in over your head, you might consider consulting an attorney to draft your agreement for you. An experienced transactional attorney typically will draft an indemnity agreement for you for a relatively low flat fee.

Gather information. Before you sit down to draft your agreement, you need to have sufficient information regarding the activity to take place and the possible claims that could arise as a result of that activity. The purpose of your agreement is to have the other person indemnify you against those risks or losses, thus transferring the risk from you to them. A strong agreement should include a detailed description of those risks, so the other person understands the liability they are assuming.

Identify the parties. Start out your indemnity agreement by listing the parties to the agreement by name, including legal business names where applicable and the address of each party's residence or primary place of business. In some situations, you can identify the person who will be indemnifying you by using the pronoun "I." This typically occurs when only one person is signing the agreement, and the activity isn't reciprocal in nature. Those types of indemnity agreements typically are drafted with the idea that many different people will sign a copy of the agreement before the activity takes place. These more generic, first-person agreements often are used by businesses that invite the public to take part in relatively high-risk activities, such as bungee jumping, and typically also include a release of liability. In situations where you're drafting the indemnity agreement to correspond to another contract or shared undertaking, identify both parties by name and write the agreement in third person, rather than using first- or second-person pronouns such as "I" and "you."

State the agreement's purpose. Before you get to the heart of the agreement, write a few paragraphs that describe the reasons the parties are entering the agreement and any background that is necessary to understand the risks involved. In legal circles, these often are known as "whereas" clauses because each clause typically begins with that word. However, that legal jargon typically isn't necessary in an indemnity agreement. These clauses are added to put the indemnity agreement into context and explain the motivations of the parties. Since they typically aren't considered legally operable or binding, these clauses should only include background information or statements – not anything relating specifically to indemnification. If there are particular risks involved in participating in the activity, this is where you might list those. Whether, and to what extent, particular risks must be listed specifically depends on the laws of your state.

Establishing the Terms

Research applicable state law. Since each state has laws that may restrict the situations in which indemnity agreements can be used, or the terms that may be included, you should have a thorough understanding of your state's law to ensure your indemnity agreement will be enforceable. The law that applies and governs the agreement typically will be the law of the state where the activity or project will be taking place – since that's the law that would govern any lawsuit that arose as the result of an injury or loss. In addition to state law, there also may be federal law that applies depending on the activity involved or the industry in which you operate. Keep in mind that if you include a clause that is prohibited in your state, a court will consider it void. In some cases, this could result in the whole agreement being legally unenforceable. In contrast, if you've neglected to include something state law requires, the court typically will read it in as though it were there. This may have the effect of negating other clauses or limiting their operation. This is another situation in which you may want to consider consulting an attorney if you feel like you're getting too far into the weeds and don't understand exactly what must be included or how the law applies to your situation.

Clearly define the scope of the indemnity. If you are the party indemnifying the other, you want the scope of that indemnity to be as narrow as possible. However, if you're the party being indemnified, you'll want that scope to be as broad as possible. A strong indemnity agreement is a compromise between these two positions that respects them both. This is another area in which state law can come into play. you can only have another party indemnify you against so much. For example, someone typically can't indemnify you against injuries or losses that occur as a result of the intentional or criminal action of a third party. When someone indemnifies someone else, they essentially are saying that they will take responsibility for those injuries or losses. However, those injuries or losses may come about as a result of the actions of someone else. The scope of the indemnity should not extend beyond the person signing the agreement, or people acting on their behalf and who are under their control, such as employees. Particularly in the construction industry, address the responsibility of contractors and subcontractors. While it isn't uncommon for contractors to be required to indemnify the builder or property owner against actions or negligence on the part of subcontractors, this should be evaluated on a case-by-case basis. If the person signing the agreement has no factual control over the actions of someone else, they typically shouldn't be required to take responsibility for those actions. On the other hand, making the contractor responsible for actions of subcontractors can encourage the contractor to engage in more oversight on the project as a whole.

Describe the situations that give rise to indemnity. Depending on the scope you've defined, there may only be specific instances in which the other party will be called upon to defend or indemnify you. Keep in mind that the obligation to defend is separate from the obligation to indemnify, and has its own legal requirements. There may be situations in which the person is required to indemnify you, but you have to put up your own defense. In these situations, the person indemnifying you typically can't be held responsible for the costs of your defense. In some cases, a lawsuit must be tried and concluded before indemnity can be established.

Address the purchase of liability insurance. In industries as varied as construction and film production, requiring the indemnifying party to purchase liability insurance that covers negligence up to a certain specified amount is standard. Typically referred to as "errors and omissions" insurance, the policy covers the indemnifying party in the event of their own negligence. Since most individuals and small businesses don't actually have the money to cover a lawsuit if one is filed, or to cover in full any losses or injuries that occur, liability insurance guarantees that they will be able to fulfill their duties under the indemnity agreement.

Consider placing a cap on damages. Particularly if you're dealing with an independent contractor or if you've required the purchase of liability insurance, including a maximum amount of damages for which the indemnifying party is liable is reasonable and prudent. Stating a cap up front also provides the indemnifying party with the maximum amount for which they'll be liable, so they can budget and plan accordingly. You also may want to include different caps for different situations. Keep in mind that the purpose of an indemnity agreement is to transfer or redistribute the risk of getting involved in a particular activity. A contributory negligence clause can handle situations in which both you and the indemnifying party were negligent to some degree.

Ensuring Enforceability

Include any necessary background information. In some situations, you must disclose the particular risks for which the indemnifying party is taking responsibility. These disclosures ensure both parties are equally informed as to the risks of their endeavor. Typically these disclosures are necessary when the indemnifying party is voluntarily engaging in some high-risk activity, such as bungee jumping or sky diving, and you are providing them with the means to do so. The purpose of these disclosures, many of which are required by state law, is to ensure the indemnifying party is aware of the risks before pursuing the activity. By signing the agreement, the indemnifying party acknowledges that they are aware of the specific risks you've disclosed. For this reason, you also should consider disclosing risks that the other party might not consider, even if they have a relatively rare chance of occurring.

Add miscellaneous provisions. Longer, more complicated agreements typically include a list of miscellaneous provisions – known as "boilerplate" in legal jargon – that make various contractual statements the law requires for a contract to be legally valid. Since these provisions typically are included in almost any contract, it should be relatively easy for you to find the applicable language that you need. Common miscellaneous provisions deal with where problems with the agreement should be resolved, including any requirement that the parties participate in alternate dispute resolution (ADR). ADR involves settling disputes through mediation or arbitration rather than through the courts. You also want to include a provision that identifies which state's law governs your indemnity agreement.

Provide ample time for review. Before you ask the other party to sign an indemnity agreement, make sure they have the opportunity to read and research the situation thoroughly, as well as consult an attorney if they want. Avoid pressuring the other party to sign the agreement during this time. You can remind them of any deadlines, but be careful about your language and keep in mind that if a contract is signed under duress, it is not enforceable in a court of law.

Sign the agreement. Your indemnity agreement typically must be signed by both you and the other party to be legally valid and enforceable. In some situations, you may want to have the signing take place in front of a notary public. You typically can find a notary public at the courthouse. Most banks also offer notary services free to their customers. Depending on how you've structured your agreement, it may only require the signature of the party who is indemnifying the other. However, if the indemnity agreement is mutual, or was created in conjunction with another agreement or contract that was signed by both parties, both parties also should sign the indemnity agreement. Once the agreement is signed, make at least two copies – one for yourself and one for the other party – and keep the original in a safe place along with any other agreements or contracts related to the same transaction or project.