Indemnified party: Overview, definition, and example
What is an indemnified party?
An indemnified party is an individual or entity protected under a contract through an indemnification clause, which requires another party (the indemnifying party) to compensate them for certain losses, damages, liabilities, or legal expenses. This protection often applies when the indemnified party faces claims, lawsuits, or financial losses arising from the indemnifying party’s actions or breaches.
For example, in a construction contract, the project owner (indemnified party) may require the contractor (indemnifying party) to indemnify them against claims from third parties due to accidents or negligence on the construction site.
Why is an indemnified party important?
Indemnification is a crucial risk management tool, offering financial and legal protection to the indemnified party. It ensures that they are not held financially responsible for certain risks that are better managed by the indemnifying party.
For businesses, indemnification clauses help allocate risks appropriately, protect against unforeseen liabilities, and promote fair accountability in commercial transactions. The indemnified party gains assurance that they will not bear the cost of legal claims or damages outside their control.
Understanding an indemnified party through an example
Imagine a software company (indemnifying party) enters a licensing agreement with a corporate client (indemnified party). The contract includes an indemnification clause stating that if a third party sues the client for intellectual property infringement related to the software, the software company will cover legal costs and any resulting damages. This protects the client from financial exposure due to potential legal issues.
In another scenario, a landlord (indemnified party) requires a tenant (indemnifying party) to indemnify them against any legal claims arising from the tenant’s use of the property. If the tenant's activities lead to a lawsuit, the tenant must cover legal fees and settlement costs, shielding the landlord from liability.
An example of an indemnified party clause
Here’s how a clause like this might appear in a contract:
“The Indemnifying Party agrees to indemnify, defend, and hold harmless the Indemnified Party from and against any and all claims, liabilities, losses, damages, costs, and expenses (including reasonable attorneys’ fees) arising out of or related to any breach of this Agreement or any negligent or wrongful act or omission by the Indemnifying Party.”
Conclusion
An indemnified party is protected by an indemnification clause, which shifts certain financial and legal risks to the indemnifying party. This arrangement provides security against potential claims, damages, and liabilities, helping businesses manage risk effectively. Including clear indemnification terms in contracts ensures that both parties understand their responsibilities and safeguards the interests of the indemnified party.
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.