It is common today for contracts to require parties to indemnify the other and maintain insurance, or add the other as an additional insured under its commercial general liability (CGL) insurance. While some companies execute contracts without reading or understanding the significance of such provisions, others have come to appreciate that these terms constitute a risk-transfer tool that can help protect their business from potential future losses. Also, more and more insurance companies are requiring their insureds to use such provisions in order to obtain coverage at particular premiums.
As the law involving indemnification and insurance clauses suggests, there is great deal of flexibility in drafting these terms. Consequently, rather than using a standard indemnification or insurance provision or performing a “copy and paste” from a prior contract or form, businesses and their in-house counsel should consider the particular circumstances, issues and needs that exist in each transaction and draft the clauses accordingly.
3. Define the losses and damages covered
In addition to identifying the parties, it is important to clearly state what losses and damages you intend to be recovered (or not) by way of the indemnification and insurance clauses. For example, are fees of attorneys, accountants, experts and other professionals recoverable as part of indemnity, or are they limited to the duty to defend obligations? Does the indemnity obligation include consequential or indirect damages, including lost profits, or is the indemnitor only responsible for actual, direct damages? Are fines, penalties and costs included within proffered indemnity, or are these types of damages excluded from indemnity coverage? Again, these are questions that parties should consider and discuss when negotiating and drafting indemnification and insurance clauses.