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Understanding Indemnities with Jeanette Nyden, Ep #270

Nn 270 jeannette nyden

Jeanette Nyden is back to talk about indemnities. She is an attorney and has spent 15 years practicing law — which is why she can talk at a high level about what indemnities are and how they apply to the world of contract professionals. She’s spent 18 years teaching people how to negotiate complex contracts. It’s where her passion for making boilerplate language accessible for the contract professional has come from. She wants contract professionals to understand what lawyers are trying to do so they can help internal stakeholders understand the risk profile and create effective indemnity clauses.

NOTE: This is NOT legal advice. For adequate legal advice, please seek out adequate legal counsel — inside or outside your organization. 

Outline of This Episode

  • [0:37] Learn more about Jeanette Nyden
  • [3:50] The definition of indemnity, defend, and hold harmless
  • [9:29] Why do companies have indemnity clauses?
  • [13:56] Injuries to person, property, or “other interests”
  • [18:19] How third-party indemnity ties-in
  • [25:12] Why you NEED to create a risk profile
  • [30:19] How to connect with Jeanette Nyden

What is an indemnity clause?

We are looking at business-to-business indemnification. When we’re talking about indemnity, you see three words/phrases: indemnify, hold harmless, and defend. Those are three important words with slightly different meanings.

  • Definition of Indemnity: a contractual obligation to compensate the loss incurred by the other party because of the acts of the Indemnitor. In plain language, the contractor is going to compensate the buyer for losses incurred to the buyer because of acts of the contractor. It’s the obligation to compensate the buyer for losses incurred.
  • Holding harmless: No matter what, if the buyer has deep pockets, the contractor is the one to hold the buyer harmless because of the contractor’s actions. When the buyer gets sued because it has deep pockets, the contractor is telling the other person that the buying company is harmless and it’s the company’s fault.
  • Defend: Where a party in a transaction agrees to defend — at their own expense — the Company they are doing work for, AND anyone within that company (affiliates, subsidiaries, parent company, officer, director, employees, etc.). This defense could cover claims, demands, losses, damages, costs, expenses, liability (legal, contractual, or otherwise) that arise from the acts of the party’s company.

Why do companies have indemnity clauses?

Companies have indemnity clauses because people can screw up in really big ways. Jeanette was talking with Lawrence Kane — the co-author of one of her books — giggling at the expense of someone who used their password to get into a company portal somewhere offsite. That password was stolen through a data breach.

Through the breach, the password was used to access the customer’s portal and the hacker did some damage. When you go back and try to find who to blame, indemnification clauses, holding harmless, and defending come into play. It doesn’t always have to be malicious but there are criminal organizations who conspire to hack into companies and hold data for ransom. For this reason, parties in a transaction have to be able to protect one another. These claims initiate a court action for your defense. It’s why companies fight so hard over indemnity boilerplates.

Injuries to person, property, or “other interests”

We all get what it might mean to do injury to property or injury to a person. But what about “other interests?” Depending on the situation and the contracts involved, this could mean that rights could extend to any third party that could be working with ABC company or on ABC property. Injury to property or other interests could include a data breach. So you have to understand the risk profile. The legal team understands what this means but it’s all based on the risk profile.

What’s a risk profile? It’s an assessment, based on the facts of the relationship and contract, of where liability could exist. For example, if you, as a contractor, are never on-site with the people you work with and you do everything virtually, it may not make sense to indemnify for injury or death to a person. Therefore, that may not be part of the risk profile. Most companies have insurance to cover all sorts of things like this.

How contract professionals can help create accurate risk profiles

A risk profile is again, the assessment of risk in a given relationship or situation. A legal team is the best bet for creating a helpful and effective risk profile. They are going to look at the contract, work to understand who is doing what for whom, and under what terms, and then make sure the agreement covers the risks that could realistically be faced in that scenario.

If an agreement in question is in any way different from what your organization usually enters into, those differences have to be communicated to the legal department. You don’t just send over the clauses marked up. The reason you must send it to your legal department is that you want to ensure that the changes or differences reflected in the new agreement are analyzed in light of potential risks. Your role as a contract professional is to clearly explain to the legal team what the working relationship, the scope of work, resources and methods used, etc. will be like in the engagement. From this, the legal team can identify the potential risks involved and come up with the risk profile.

Risk profiles can be pretty expansive and should always be tied to the limitation of liability and to the insurance profile — what coverage do you have, what are my per-occurrence and aggregate amounts? If you have too little coverage then there is greater exposure to risk.

Your role in a situation like this is to ensure that your legal team has everything they need to understand the job, the risks involved, and how they can mitigate risk in the scenario.

Resources & People Mentioned

Connect with Jeanette Nyden

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