THE INTERSECTION OF INDEMNIFICATION AND INSURANCE

Indemnification provisions are a key feature of a wide variety of legal contracts. Indemnification is a contractual promise by one party (the indemnitor) to compensate the other party (the indemnitee) for certain losses, liabilities, damages, or costs arising from events specified in the contract. The primary goal of indemnification is to shift the risk of loss to the party best positioned to control it. An indemnification provision does not eliminate the indemnitee’s liability to a third party; instead, it transfers the financial responsibility for that liability from the indemnitee to the indemnitor.

An indemnification clause is only as valuable as the indemnitor’s ability to pay. To ensure the indemnitor has the necessary resources, the indemnitee should require the indemnitor to maintain specific liability insurance limits. A Certificate of Insurance (COI),issued by the indemnitor’s insurer, serves as proof that this coverage is active and meets the required limits.

By default, many insurance policies exclude coverage for liabilities that the insured has contractually assumed. However, this gap is usually bridged by a contractual liability endorsement or by defining the agreement as an insured contract within the policy. This allows the insurance company to step in and cover the insured’s indemnity obligations.

Insurance coverage does not necessarily follow the scope of a particular indemnification obligation. Often, insurance policies provide protection that may be broader or more restrictive than that provided under the indemnification clause in the insured contract. Like any contract term, indemnification and insurance clauses are negotiable. They should be customized and tailored to the circumstances of the contract at issue.

Insurance protection benefits an insured indemnitor by effectively transferring the risk from the indemnitor to the insurance company, thereby mitigating the financial impact of an indemnification claim that the indemnitor must honor. However, to be able to fall back on insurance, the indemnitor should avoid broadly worded indemnification clauses, such as those promising to cover “any and all losses, of every nature and kind, whether in contract, tort or under any other legal theory…” Such clauses expose the indemnitor to liability for an undefined range of losses that they cannot control or manage. Instead, the indemnitor should insist on specific drafting, for example, limiting an indemnity clause to “bodily injury, death, or damage to tangible property.”  These categories align with the triggers for Commercial General Liability (CGL) policies. Thus,  the indemnitor will likely be able to pass on any amounts they are required to pay to their insurance carrier.