Custodian’s indemnification: Overview, definition, and example
What is custodian’s indemnification?
Custodian’s indemnification refers to the legal protection given to a custodian, ensuring they are compensated for any losses, damages, or legal expenses incurred while performing their duties. A custodian is responsible for safeguarding assets, documents, or funds on behalf of another party, and indemnification ensures they are not held personally liable for risks beyond their control.
For example, a bank acting as a custodian for investment funds may require indemnification from its client in case a third party makes a legal claim against the bank for actions taken in good faith.
Why is custodian’s indemnification important?
This protection is important because custodians handle valuable assets, sensitive information, and legal obligations. Without indemnification, a custodian could face financial or legal consequences for actions they took while fulfilling their duties—even if they acted properly.
For businesses, including a custodian’s indemnification clause helps attract reliable custodians by reducing their risk exposure. It also clarifies the limits of the custodian’s liability, ensuring fair risk distribution between the parties.
Understanding custodian’s indemnification through an example
Imagine a financial institution that acts as a custodian for investment accounts. A client accuses the custodian of mismanaging assets, even though the custodian followed all regulations. The indemnification clause in the agreement allows the custodian to recover legal defense costs from the client.
In another example, a document storage company serves as a custodian for corporate records. If a third party sues the storage company over lost documents due to an unforeseen disaster, the indemnification clause protects the custodian from direct liability, provided they met all contractual obligations.
An example of a custodian’s indemnification clause
Here’s how a custodian’s indemnification clause might appear in a contract:
“The Client agrees to indemnify and hold harmless the Custodian from any claims, losses, damages, or expenses (including legal fees) arising from the Custodian’s performance of its duties, except in cases of gross negligence, fraud, or willful misconduct.”
Conclusion
Custodian’s indemnification protects custodians from legal and financial risks when handling assets or responsibilities on behalf of others. It ensures custodians can perform their duties without fear of unjust liability while clarifying the scope of their obligations.
For businesses, including a well-defined indemnification clause in custodian agreements helps prevent disputes and provides clear guidelines on responsibility and risk management.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.