FAQ.36

Question:

Are indemnifications and hold harmless agreements a good thing?

Short Answer:
The value of an indemnification or hold harmless agreement depends on the character and capacity of the person/entity issuing the agreement.

Long Answer:

An indemnification or hold harmless agreement may be considered as a separate side contract and they tend to be appropriate when one party to a contract requires that the other party protect it from some possible future liability arising from the execution of the contract. Its value depends on the character of the issuer, and their capacity to honour the agreement.

Character – People have been known to agree to almost anything in order to get what they want now. Their willingness to honour their commitment, if they are called upon to do so, at some point in the future may be less than anticipated. Depending on the nature of any claim that may arise, it may be less expensive to settle the claim with the claimant than to take someone to court in an attempt to force them to honour the agreement.

Capacity – Even if the issuer has integrity, and wants to honour the indemnification or hold harmless agreement, the question arises as to their capacity to do so. If they have $100,000 available with which to indemnify and hold you harmless, and the claim is for $1,000,000, they lack the capacity to do so. The $900,000 difference will likely have to come out of your pocket!

Will the entity issuing the indemnification or hold harmless agreement still exist in the future when the claim arises?

The terms indemnification and hold harmless are often used interchangeably; however, depending on the jurisdiction, there may be differences in meaning and application. Consulting a lawyer to draft or review an agreement would be prudent.

In summary, indemnification or hold harmless agreements are good things to have, but they have their limits. They are not a panacea and may not cover all circumstances. Whether they make sense as a means of protection depends on an assessment of the relevant facts of each instance. It would be prudent to engage a legal professional to review and advise about your specific circumstances.