Indemnity: Shift The Risk

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There are many ways in which individuals or corporations can mitigate the risks they experience on a daily basis. One of the more common ways of dealing with this risk is to shift the risk with an indemnity agreement. Indemnity is where one party shifts the responsibility for its own liability to someone else. As an alternative view, it can be described as an agreement wherein one party agrees to accept the liability for the other.

Complexity – A Feature, Not an Option

Indemnity agreements can be complicated and, in most cases, they are purposefully made with many details. The type of indemnity and the circumstances in which the indemnity will pass from one party to another must be spelled out and a detailed written contract. 

These agreements can describe the circumstances in which indemnity will be transferred, such as the specific construction project or the leasing of a specific property. The agreements can also cover the types of indemnity that one party will incur. For example, an agreement may cover all liability for incidents that may be the fault of the indemnified party. 

Additionally, indemnity may be limited by a certain scope of conditions. For example, the indemnity may come into play only for incidents that arise out of the use of certain premises or it may arise out of the work being done on a construction project. 

In addition to stating the conditions that may limit indemnity, an agreement can spell out which kinds of actions may be indemnified. The agreement may indicate that the party being indemnified cannot be indemnified for acts of their own negligence. Indemnity provisions can be limited to property damage, or they can be written to include bodily injuries or to cover only bodily injuries.

Just Passing Through

Some indemnity agreements are known as pass-through agreements. In a pass-through agreement, one party agrees to indemnify a third party on behalf of the other party to their own agreement. For example, Company A and Company B may agree to indemnify each other. Company A can then strike an agreement with Company C but, as part of that agreement, Company C must also agree to indemnify Company B, even if it has no direct relationship with Company B. 

Because these pass-through programs often involve companies or individuals that are unknown to the indemnitor it is extremely important to review such agreements carefully before agreeing to shift the risk. It is also important to ensure that your insurance company is aware of the agreements.

For some individuals or companies, an indemnity agreement can be an excellent way to shift liability from yourself to another party. Conversely, if you are the other party, you may be accepting more risk than you are aware of if you do not carefully review the contract that you are signing.