This contract tip is about deciding who should be an indemnified party.
Indemnification provisions identify a set of indemnified parties. These are the entities and people who receive a defense and reimbursement for the covered damages and claims.
In every contract, we have to decide who should be as included as indemnified parties. There is no one correct answer. Some contracts limit the indemnified party to include only the parties that signed the contracts. Others include all related entities and people - affiliates, directors, employees, contractors, representatives, and assigns.
Who ends up as an indemnified party depends on your risk allocation approach and bargaining power.
Here's is a three-part process that I use to figure it out.
1. Is the indemnification mutual or one-way? If the provision is one-way, I tend to use the language that most favors my client. But be careful with this approach. We often have to make the provision mutual during negotiations. If that could happen, I tend to draft the indemnified party language with a more even-handed approach.
2. Which party is more at risk for causing claims and damages and for the covered events? If my client is more likely to cause the claims and damages, then we are more likely to be the ones defending and reimbursing. In that case, I keep the indemnified parties' scope to a limited number. If I'm facing the opposite situation and my client is more likely to be the one defended and reimbursed, I expand the list to add more indemnified parties.
3. What related entities and people also may be subject to claims? Consider the obligations in the contract. If my client's affiliates and contractors are heavily involved, I often push to include them too. One last word of caution. No matter your approach, remember that we don't actually know what will happen. A contracting party that drafts a very pro-indemnified party clause may end up being the one indemnifying. The safest approach is to balance the indemnification rights and obligations reasonably, regardless of whether we'd indemnify or be indemnified.
What's your approach to deciding whom to include as indemnified parties?
