May 2019

Indemnification Clauses

A brisk, clear-eyed look at the most important, boring aspect of risk management.

Written by Jordan Lipp, Esq. | 75 Views | 0 comment

Most people’s eyes glaze over whenever the topic of indemnification clauses comes up. However yawn-inducing they may be, indemnification clauses are nevertheless a critical piece of legal risk management. What exactly are they? How do they work? How should they be written? And why should you care? Here are the quick, painless answers.

Let’s start with an actual lawsuit, with a few minor details changed to keep the client anonymous, to show the incredible ramifications of the language within an indemnification clause.

Falling Off A Horse
To add to its summer attractions, a ski resort contracted with a horseback riding outfit company to run horseback rides at its resort in the summer. It was a popular activity, with guests riding the gondola up to the top of the mountain where they could ride horseback on great trails with beautiful views. What could go wrong?

Well, a guest fell off a horse on a trail ride and received a traumatic brain injury. The guest promptly sued both the ski resort and the outfitter, claiming, among other things, that (i) the outfitter chose improper tack, which caused the guest to fall; and (ii) the ski resort hired the wrong outfitter. As the ski resort’s attorney, I asked the ski resort for its contract with the outfitter.

Thankfully, there was a contract, and thankfully, it contained an indemnification clause. The clause said that the outfitter would “indemnify and hold harmless” the resort for any accidents that occurred as a result of the outfitter’s operation. So, the ski resort wrote a letter to the outfitter (often referred to as a tender letter) demanding that the outfitter hire and pay for the attorneys for the ski resort to defend it in the recently filed lawsuit.

However, the outfitter’s attorneys refused to pay for the ski resort’s defense, as the contractual language only said: “indemnify and hold harmless,” as opposed to saying “indemnify, defend, and hold harmless.” By leaving out one word, the ski resort was arguably on the hook for all of its defense costs—and defending a traumatic brain injury case is not an inexpensive proposition.

The upshot: The ski resort had to defend itself in the lawsuit for several years before ultimately winning the lawsuit on a summary judgment motion. Had one word been added to the contract, the ski resort could have saved hundreds of thousands of dollars in attorneys’ fees.

Has this story of one missing word been sufficiently scary to wake you up? Good. Let’s dive into these indemnification clauses.

Types of Indemnification Clauses And Critical Language
The legal definition of indemnification is “the action of compensating for loss or damage sustained.” Who has to compensate whom? And when? These are the questions an indemnification clause should answer.

Let’s look more closely at the language of the horseback riding case’s indemnity clause. At first glance, it seems pretty sound:

Indemnification. Outfitter shall hold harmless and indemnify Ski Area and its affiliates and their respective successors and assigns, from all injury, loss, claims or damage to any person or property while at the Ski Area or arising in any way out of Outfitter’s activities at the Ski Area.

In comparison, here is more robust language I use as model language when I’m teaching this issue in my Outdoor Recreation and Ski Law course at University of Denver Sturm College of Law:

Indemnification. Outfitter agrees to indemnify, defend (with counsel reasonably selected by Ski Area), and hold harmless Ski Area, and all of its affiliated organizations and companies, successors and assigns, each of their respective insurance carriers, agents, employees, volunteers, representatives, assignees, members, managers, officers, directors, and shareholders (collectively referred to as “indemnities”) from all injuries, losses, liability, claims, demands, damages, and causes of actions of every kind and character, regardless of fault, to any person or property while at Ski Area, or arising in any way out of Outfitter’s activities at or related to Ski Area, to the fullest extent permitted by law, including but not limited to any attorneys’ fees and court costs, incurred by, or claims made against indemnities.

This stronger language is certain to cover the ski resort’s defense. Moreover, it gives the ski resort the right to choose counsel for that defense. This can be very important, as the last thing the ski resort wants is the outfitter to hire a subpar lawyer to defend the resort. This language also includes a much more complete laundry list of who gets the protection of the indemnity clause (known in legalese as the “indemnities”). And, this language clarifies that the clause applies “regardless of fault.”

That said, both clauses are almost equally good for the ski resort in one respect—the indemnification is one-way and guaranteed.

Many indemnification clauses only provide indemnification if the outfitter (i.e., the “indemnitor” in legalese) is negligent. While such negligence indemnification clauses may be better than nothing, they can be difficult for the contracting parties. For instance, such a clause can put the ski resort into a position where it has to show the outfitter was negligent in order to get the indemnification protection. This is problematic, to say the least, as it adds uncertainty and legal expenses, and often the ski resort does not want to take the position that its own contractor was negligent.

Another issue: Indemnity clauses in many industries are drafted to be mutual negligence clauses. That means whichever party was negligent will defend and pay any judgment of the party that was not negligent if there is a lawsuit by a third party. These contracts can be difficult to enforce because each side’s negligence is a disputed issue, which prompts in-fighting between the potential defendants.

Fortunately, there are numerous ways to draft the clauses to balance the interests of the contracting parties.

Snap To, There’s More!
Let us revisit the horseback riding case. And, let us assume hypothetically that the case went to trial, and the jury ordered the ski resort to pay $5 million in damages. What then?

The ski resort, even under the poorly written indemnity clause, should still be entitled to $5 million from the outfitter. However, this begs the question: Does the outfitter have $5 million laying around to pay the ski resort? As an indemnification agreement is a private contract between parties, if the outfitter can’t pay the full $5 million, the ski resort is still on the hook for payment of that amount to the guest.

In the horseback riding case, this was a real concern, as the outfitter had only $1 million in insurance (which hopefully would have helped pay), because otherwise the outfitter only had horses and saddles. If the ski resort lost the case (which fortunately it did not), the sale of fifty saddles would hardly help in paying a multi-million dollar judgment.

So, in order for an indemnification clause to be worth more than the paper on which it is written, it must be backed up with assets. The most common method of doing this is by requiring the other contracting party to add the ski resort to the other party’s insurance coverage, and make sure that the insurance available is sufficient to cover any likely judgment. This will provide the assets to back up the clause in case someone does fall off the horse, so to speak. That said, the details of insurance requirements in contracts is complex, and should be left to another article.

Other Considerations
There are any number of other considerations with regard to indemnification clauses. I’ll touch on two of the biggest here: which contracts should have indemnification clauses, and the impact of local law on indemnification clauses.

When to include indemnification clauses. I’m often asked which contracts should contain indemnification clauses, and my typical response is that so long as they are favorable, “each and every one of them.” Every vendor, contractor, or other party that you work with, who will agree to indemnify you, is someone with whom you should have an indemnification clause in the contract.

Let’s take the example of a concert series on the mountain. You may be hiring out the concert promoter, the alcohol vendor, the stage construction crew, and the private security company to help put on the concert. Any one of them can expose your ski resort to risk—whether it’s a falling amplifier, a fight between a patron and security personnel, or a drunk driver leaving the event and hitting someone. An indemnification clause with each and every one of these vendors is important, and reduces the legal risk of the resort. And this one example is only scratching the surface with regard to vendors and contractors ski resorts work with.

Local laws and indemnification. Also, like everything else in the law, every state has a different set of laws, and each state’s legislature tends to be concerned with certain types of indemnification clauses. As such, please check with your local attorney to make sure your indemnification clauses are properly written and enforceable.

Hopefully, the risk of paying attorneys’ fees and then potentially a $5 million judgment against your ski resort for someone else’s error is sufficient to have kept you awake and reading through an otherwise boring article. Indemnification clauses may sound frightfully dull, but they are a critical piece of legal risk management.