Exception to right of indemnification: Overview, definition, and example
What is an exception to the right of indemnification?
An exception to the right of indemnification refers to specific circumstances where a party is not entitled to be reimbursed or protected against losses, liabilities, or legal expenses. Indemnification provisions are commonly found in contracts to protect individuals or companies from financial harm caused by claims, lawsuits, or damages. However, certain exceptions are typically included to prevent indemnification in cases of misconduct, fraud, or violations of law.
For example, a company may agree to indemnify its executives for legal expenses incurred in lawsuits related to their work, but not if they engaged in intentional wrongdoing or gross negligence.
Why is an exception to the right of indemnification important?
Exceptions to indemnification are important because they ensure that a party is not shielded from responsibility in cases of intentional misconduct, fraud, or illegal actions. These exceptions help prevent abuse of indemnification provisions and ensure accountability.
For businesses, including exceptions in indemnification clauses helps protect against covering wrongful acts that should not be shielded. For individuals, it clarifies the limits of protection under indemnification agreements, ensuring that indemnification is not used to excuse unethical behavior.
Understanding exception to right of indemnification through an example
Imagine a corporation provides indemnification to its board members for any lawsuits arising from their corporate duties. However, the indemnification clause includes an exception stating that directors will not be indemnified if they commit fraud or engage in willful misconduct. If a director is sued for making an honest business decision that resulted in financial loss, they would be covered under indemnification. But if the director is sued for embezzling company funds, the exception would apply, and they would not receive indemnification.
In another example, a software company enters into a contract with a service provider, agreeing to indemnify the provider against legal claims related to the use of the company’s technology. However, the indemnification clause includes an exception stating that the service provider will not be indemnified if they use the technology in violation of intellectual property laws. If a lawsuit arises due to unauthorized use, the company would not be responsible for indemnification.
An example of an exception to right of indemnification clause
Here’s how an exception to right of indemnification clause might appear in a contract:
“Notwithstanding any provision of this Agreement, no Party shall be entitled to indemnification for any Losses arising from (i) fraud, willful misconduct, or gross negligence; (ii) any intentional violation of applicable law; (iii) any acts taken in bad faith; or (iv) any claims arising from personal enrichment at the expense of the indemnifying Party.”
Conclusion
An exception to the right of indemnification ensures that indemnification protections are not misused to cover intentional wrongdoing, fraud, or other misconduct. This clause helps maintain fairness and accountability in contractual relationships by setting clear limits on when indemnification applies.
For businesses, properly defining exceptions prevents the misuse of indemnification and protects against covering unethical actions. For individuals, understanding these exceptions clarifies the extent of legal protection available under indemnification agreements.
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.