Indemnification Agreements are created and designed when one party agrees to secure another against an anticipated loss or damage. For example, someone may agree to turn a business over to another person for a reduced price if they pay the debts and other obligations of the business. In a broad sense, insurance policies are indemnity contracts, and simply put indemnification is the act of being protected from costs by shifting them to another party. It is a common element in an effective construction risk management program. However, the indemnification requirements and stipulations can become a matter of great controversy.
An indemnity agreement is a collateral contract or assurance in which financial responsibility among parties is decided. A construction contract is an example of an indemnity agreement. If party A would like to hire Party B to construct a playground, but Party B is reluctant due to the possibility of suffering future liability, Party A may select to indemnify Party B against any future claims and lawsuits that may originate due to Party B’s performance in the agreement. This example agreement is designed to protect Party B and encourages Party A to participate in the contract.
An indemnity agreement requires one party to protect another party against anticipated losses, claims, or lawsuits that may occur in the future. The agreement specifies who will pay certain costs and who is exempt from certain costs. It also details the legal consequences of an act or forbearance on the part of one of the parties or of some third person. It documents the pact between the parties and describes the various basic terms of the indemnification, such as the following:
· Indemnification: Identifies the certain action that is being indemnified from any future claims and lawsuits;
· Procedures for Indemnification: Enumerates the indemnification procedures;
· Severability: If any part of the agreement is determined to be unenforceable, the remaining provisions will stay enforceable to the extending allowed; and
· Binding Effect: All parties involved in the agreement will be bound to the terms of the agreement.
An indemnity agreement should be carefully reviewed prior to finalizing the contract to determine the extent of your company’s liability. Once the scope is understood, you may want to negotiate the terms to limit your exposure. The application and enforcement of an indemnification agreement does, however, depend upon the statutory and common law of the jurisdiction in which enforcement is sought.
One of the first components of an indemnity agreement that should be examined is the validity of it; terms should be conspicuous to both parties. The Texas Supreme Court has adopted the standard for conspicuousness that is contained in the Uniform Commercial Code. Texas requires there to be a component that will grab the attention of a reasonable person when he or she looks at it.
Language that is hidden under a separate heading or surrounded by unrelated terms is not considered conspicuous. Language found on the opposite side of a sales order under a paragraph entitled “Warranty" or surrounded by unrelated terms is also not considered to be obvious to the average person. Components of an indemnity agreement should be written so that a reasonable person quickly notices it.
Language hidden in the body of a form is considered acceptable only if it is larger or in a different, contrasting type or color. Additional language in an extremely short document is also permissible under Texas guidelines.
The indemnity agreement must also have been established before a loss and by an authorized person in order to be considered valid. An employee on the job site or a field foreman who is unauthorized to commit the company to such a critical contract will deem an agreement invalid.
A Texas indemnity agreement must uphold Texas laws to maintain its validity. Many states have invalidated indemnity agreements under certain, unique circumstances. Therefore, it is important to know where the agreement was put in effect and which laws may apply to the interpretation of the agreement.
In order for one party to maintain indemnification due to his or her own negligence, the agreement must specifically set forth that intent; this is known as the Ethyl Rule. In Texas, if previously specified in the contract, a party can provide indemnity for one’s sole negligence, concurrent negligence, or comparative negligence. The following is an example, which held sufficient to afford indemnity to the owner of Arco.
“Contractor agrees to protect, defend, indemnify and save company harmless from and against all claims...without regard to the cause or causes thereof or the negligence of any party or parties, arising in connection herewith" (Tex. Civ. App. – Corpus Christi, 1989).
Some courts have still found certain indemnity agreements to be valid even if the party seeking such exemption has not been found to be negligent; these situations are known as lower court exceptions to the Ethyl Rule. The Supreme Court has not yet ruled upon any sort of exception.
Some courts have found negligence to be a legitimate defense argument in certain situations, which must be pled and proven by the indemnitor. In Continental Steel Company v. H.A. Lott, Inc., 772 S.W.2d 513 (Tex. Civ. App. – Dallas, 1989), it was held that an indemnity agreement obligated a subcontractor to indemnify the general contractor for its costs and expenses incurred in the successful defense of a claim arising out of a worker’s injuries which had been alleged to have been caused by the general contractor’s negligence. The court held the express negligence doctrine did not apply to the indemnity provisions that covered losses not resulting from the indemnitee’s own negligence. In other words, because the jury had not found the general contractor to be negligent, the court held that it was entitled to recover its defense costs and expenses from the subcontractor with whom it had an indemnity agreement that did not satisfy the Ethyl express negligence test.
Agreements relating to a well for oil, gas, water, or to a mine for minerals, in just about any way, are exceptions to the standard indemnity rules, including acts that are collateral to the rendering of services or furnishing or renting of equipment and incidental transportation; construction, maintenance, or repair of oil, natural gas, liquids, or gas pipelines are not part of this exception. Despite the express negligence test, an indemnity agreement may be rendered invalid by this statute unless it involves a joint operating agreement that contains provisions for the sharing of costs or losses arising from joint activities; this includes costs or losses attributable to the negligent acts or omissions of any party affiliated with the joint activity. According to this provision, a joint operating agreement is defined as an agreement between or among holders of working interests or operating rights for the joint exploration, development, operation, or production of materials.
However, an indemnity agreement can be reinforced if the indemnitee provides and is supported by their own insurance coverage. Regarding mutual indemnity obligations, commitments are limited to the extent of the insurance coverage and its monetary limits. In a unilateral indemnity obligation, where one party agrees to indemnify another for his sole negligence, the amount of insurance required cannot exceed $500,000.
An indemnity agreement is also considered void if it promises or provides for a contractor who is to perform the work to indemnity a registered architect, engineer, agent, servant, or the employee of one of these workers from liability that:
· Is caused by defects in plans, designs, or specifications approved, prepared, or used by the architect or engineer, or the negligence of that same person, while carrying out the professional duties associated with such; and
· Arises from: (a) personal injury or death; (b) property injury; or (c) any other expense that arises from personal injury, death, or property injury.
There is no existing statue which applies to a contract or agreement in which the architect or engineer is indemnified from liability for negligent acts other than those described in the chapter or the negligent acts of the contractor, any subcontractor, or any person directly or indirectly employed by the contractor or sub.
Releases within an Indemnity Agreement
The purpose of a release agreement is to relieve a party in advance for responsibility for its own negligence. Oftentimes, these are included in a written contract, but must still satisfy the same conspicuousness requirements required for all indemnity agreements.
If you wish to create a collateral contract or assurance in which financial responsibility amongst all parties is decided, then contact an attorney as soon as possible. Your attorney will evaluate all aspects of your matter and explain all options available to you, in order to ensure the best possible outcome for your case.