Business contracts often contain provisions where one party is legally required to assume the financial obligations of another party. This is called an “indemnification” and they typically come in the following three types:
Type I Indemnification
One party assumes the financial obligations of the other party – even if that party is 100% at fault and/or the loss arises from their willful misconduct. The type of indemnification brings the greatest risk as its exposures are extremely broad and are not typically covered by general liability insurance.
Type II Indemnification
One party assumes the financial obligations of the other party – unless the other party is 100% at fault or the loss arising from their willful misconduct. This is the most common type of indemnification and while not equitable, it is much better than a Type I agreement and its exposures are more often covered by general liability insurance.
Type III Indemnification
One party assumes the financial obligation of another party but only to the extent that each of the parties are responsible for the loss. If one party is deemed to be 60% responsible for the loss, the other party will assume 60% of the financial obligation. This type of agreement is the most equitable and ther one that you should strive for whenever possible.
Indemnification agreements can be quite complex and should be reviewed by legal counsel prior to execution. Nonetheless, indemnification agreements often arise at the last minute before execution and timely information is needed. Please let us know if we can be of assistance.