Indemnity agreements are an important part of any risk management strategy. Companies rely on legal and strategic experts to structure these agreements. Unfortunately, even with expert input there can be gaps, gray areas, and uncertainty.
If and when those issues appear, it can invalidate an indemnity agreement. Even in the best cases it often leads to a protracted court battle. The better approach for all companies is to negotiate indemnity agreements carefully. The more clearly indemnity is defined, the more consistently responsibility is assigned. Here are some tips to swing things in your favor:
Pick Your Words Carefully
The language of indemnity agreements is incredibly important. The courts interpret certain phrases differently, and small differences in wording can have huge consequences. It is essential to scrutinize agreements carefully, particularly as they apply to indemnities. In particular, watch out for the phrase “to the extent caused by.” It is often used to shift indemnity from a larger company onto a smaller one.
Understand the State Law
When negotiating an indemnity agreement it’s not always clear which state’s law will apply to a contractual dispute. However, the letter of that law will have a huge impact on the outcome. Knowing what state’s laws apply and when leads to stronger agreements overall. It is also important to be aware of any anti-indemnity laws in the state. They typically protect the party with the weaker bargaining position.
Define the Insurance Obligations
Companies must request specific policy terms when creating insurance obligation agreements. These should clearly outline the acceptable limits and define whether a primary/excess/umbrella policy is to be used. The goal is to eliminate unexpected gaps in coverage and avoid disputes between insurance providers.
Request the Right Additional Insurance Endorsement
In cases like workers compensation claims the total cost is difficult to predict. In order to give companies coverage against this uncertainty, additional insurance endorsements exist. When and how these endorsements are applied is complicated, but they provide an essential financial safety net. This is true for all parties involved, which is why the pros/cons of various endorsements must be considered carefully.
Keep Legal and Risk Management Linked
There is an equal and important relationship between the legal and risk management departments throughout the indemnity agreement process. The closer these departments communicate and collaborate the better. For instance, the risk department must be aware of the terms and conditions in any contract the legal department drafts. Similarly, risk managers must make the legal department aware of insuring obligations. Finally, bringing the insurance company into the mix helps companies identify more suitable coverage options.
Each one of these tips takes substantial input and ongoing effort. It’s worth it, however, because unexpected indemnity can be disastrous. This is not a risk that companies worry about every day. But if and when it arises, the consequences are very hard to overcome. It all comes down to the indemnity agreement. Companies can either act early and insert language that benefits their interests. Or, they can act later and be surprised and dismayed to find that language missing.