Indemnity agreements, also known as indemnity clauses, play an integral role in contracts. That's because they are designed to punish the nonperforming party and reassure the damaged one they will be reimbursed for losses caused by the errant entity. Indemnity clauses are included in contracts as a way of discouraging parties from breaching the underlying contractual agreement.
What is indemnity
Indemnification is protection against loss or damage. When a contract is breached, the parties look to its indemnity clause to determine the compensation due to the aggrieved party by the nonperformer. The point is to restore the damaged party to where they would have been if not for the nonperformance.
Another type of indemnity is loan indemnity. In the B2B world, loan indemnity is a valuable protection against the sudden inability to repay a mortgage or loan. For example, if a borrower suffers a disabling event that impairs their ability to pay their secured debt, like a mortgage, their loan indemnification clause kicks in to pay the debt.
In legal terms, indemnity requires a nondelivering entity to compensate the aggrieved party for losses it incurred or expects to as a result of the nonperformance. An indemnity clause can also act an as exemption from liability from damages, so the wording of the agreement is extremely important.
Indemnity and contracts
There are numerous contractual scenarios that could benefit from having an indemnity clause as part of the agreement. They include:
- Commercial contracts
- Supply agreements
- Loans
- Leases
- Licensing agreements
Promissory notes can also include an indemnity agreement, triggered by the loss, theft, destruction, or damage to the note. Adding an indemnity agreement to a promissory note requires the borrower to execute and deliver a replacement promissory note if the original note is lost, destroyed, stolen, or damaged. Such an agreement protects the noteholder's ability to enforce the loan.
An indemnity agreement also alleviates the borrower of all financial liability for executing a new promissory note to replace the one that was lost or damaged. It assures the borrower that no one will try to enforce both the original note and the new note and that the borrower will not have to pay anything in connection with the creation and execution of the new note.
If you already have a signed promissory note that has been lost or damaged, you can prepare a separate affidavit of lost promissory note and indemnity agreement that contains a promissory note indemnity agreement. An affidavit is a written statement that is made under oath and is therefore legally binding on the party that signs it.
Promissory notes with hold harmless indemnity agreement
To anticipate the possibility of a promissory note becoming lost or damaged, it is a good idea to include an indemnity agreement in the note itself. Such a provision also requires the borrower to execute a replacement note if the original is lost or damaged.
If a promissory note does get lost or damaged, it will be necessary for the noteholder to execute an affidavit of lost promissory note and indemnity agreement.
The affidavit will be a statement setting forth the terms of the original note and the details of how it was lost or damaged and including the type of indemnity agreement mentioned above. It must be signed in the presence of a notary public.
You don't need to be concerned about how to write an affidavit, as the affidavit of lost promissory note and indemnity agreement can be completed with the assistance of an attorney.
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FAQs
The word indemnity means security or protection against a financial liability. It typically occurs in the form of a contractual agreement made between parties in which one party agrees to pay for losses or damages suffered by the other party.
What is indemnity with an example? ›
In an indemnity agreement, one party will agree to offer financial compensation for any potential losses or damages caused by another party, and to take on legal liability for whatever damages were incurred. The most common example of indemnity in the financial sense is an insurance contract.
Why is indemnification important? ›
Indemnification clauses can limit the liability of one party, reducing their financial exposure in the event of a loss or damage. Limiting their liability reduces their financial exposure and protects them against potential losses.
What best describes indemnity? ›
Indemnity is a type of insurance that covers a wide range of damages and losses. In the indemnity clause, one party commits to compensate another party for any prospective loss or damage.
Why is the principle of indemnity important? ›
The principle of indemnity governs that an insurance contract compensates you for any damage, loss or injury caused only to the extent of the loss incurred. Insurance contract ensures that the insurer does not make a profit in the event of an incurred loss.
What is the importance of indemnity and guarantee? ›
In a guarantee, the guarantor promises to fulfill the obligations of the principal debtor if they fail to do so. Protection: Both indemnity and guarantee offer protection. Indemnity protects against losses, while a guarantee protects against a failure to fulfill an obligation.
Is indemnity good or bad? ›
There's nothing inherently wrong with having an indemnity that can apply to claims between the parties—if that's what the parties intend. But if the parties want the indemnity to apply only to third-party claims, they can say so in the contract.
What are the duties of indemnity? ›
1) The indemnifier will have to pay damages which the indemnity holder will claim in a suit. 2) The indemnity holder can even compel the indemnifier to pay the costs he incurs in litigating the suit. 3) If the parties agree to legally compromise the suit, the indemnifier has to pay the compromise amount.
What is indemnity in a sentence? ›
The government paid the family an indemnity for the missing pictures. In case of loss of the vessel, the ship owner receives no indemnity for loss, but acquires immunity from payment of the loan.
What is the best definition of indemnification? ›
To indemnify, also known as indemnity or indemnification, means compensating a person for damages or losses they have incurred or will incur related to a specified accident, incident, or event.
An indemnity policy can be purchased from specialist legal insurers to cover various types of risks or property defects. It protects the purchaser from a reduction in value as a result of the potential issue.
Is an indemnity legally binding? ›
It's a legally binding promise to protect another person against loss from an event or series of events: they are indemnified and protected from liability. Sometimes, indemnities are implied into the terms of contracts automatically, due to the nature of the legal relationship between the two parties.
What is the purpose of the indemnity? ›
Indemnification is protection against loss or damage. When a contract is breached, the parties look to its indemnity clause to determine the compensation due to the aggrieved party by the nonperformer. The point is to restore the damaged party to where they would have been if not for the nonperformance.
What is the obligation of indemnity? ›
In contract law, an indemnity is a contractual obligation of one party (the indemnitor) to compensate the loss incurred by another party (the indemnitee) due to the relevant acts of the indemnitor or any other party.
What is the value of indemnity? ›
Indemnity Value means the cost necessary to rebuild, replace, repair or restore (as the case may be) Property Insured to a condition substantially the same as its condition at the time of the Damage, but not better or more extensive than that condition, taking into consideration its age, wear and tear and remaining ...
What is the purpose of an indemnity form? ›
It is primarily intended to protect the person who is providing goods or services from being held legally liable for the consequences of actions taken or not taken in providing that service to the person who signs the form. Indemnity clauses vary widely.
When should an indemnity be given? ›
A primary example is a contract providing that each party shall indemnify the other parties for losses caused by their own breach of contract. An owner and contractor in a construction contract would also often seek mutual indemnity for construction defects or other damages.
What does it mean for someone to indemnify you? ›
To indemnify, also known as indemnity or indemnification, means compensating a person for damages or losses they have incurred or will incur related to a specified accident, incident, or event.
What is the purpose of an indemnity plan? ›
With an indemnity plan (sometimes called fee-for-service), you can use any medical provider (such as a doctor and hospital). You or the provider sends the bill to the insurance company, which pays part of it. Usually, you have a deductible—such as $200—to pay each year before the insurer starts paying.
