Overview of Business Indemnification

What is indemnification?

Indemnify means to insure against loss or reimburse after loss. Insurance is the most common form of indemnification that is familiar to most people. In most cases, indemnification involves actions caused by negligence or malice but it can apply to other situations. In business, indemnification is a contractual obligation to in which one party agrees to protect another party for financial loss. It is known as the indemnification clause.

When, Where and How?

Indemnification clauses are standard in many areas of business. Corporations use indemnification clauses to protect their directors and officers against shareholder lawsuits or actions taken in furthering the corporations' business. They are also common in the sale of a business or business real estate. The seller indemnifies the buyer from potential lawsuits or the finding of toxic waste on a business site. Indemnification clauses do not protect against fraudulent or illegal activities. The likelihood of placing yourself and your business in jeopardy of huge financial liability as a result of an indemnification clause is great. Indemnification clauses are often standard boilerplate language in most contracts.

Beware of Boilerplate

Indemnification clauses can be hidden in legal language. If you sign a contract with language in it that says, you agree to "hold harmless" the seller. This is indemnification. This should be a red flag that sets off your warning bells, telling you to take a good look at what you are agreeing to; ask for disclosures and make sure the disclosures are part of the contract.

Do You need a lawyer?

Indemnification clauses can often be stuck in the small print of a business contract. Indemnification is risky because you are agreeing to a set of unknown factors. It is not wise to sign a contract for a major purchase or investment in business without competent legal counsel.