We provide a great deal of advice to our clients on produce guarantees, seller agreements and produce sale agreements. Most of our attention to these agreements centers on the indemnity clause. When answering a client's question regarding an indemnity clause, I ask if they have read my articles on indemnity agreements. I now realize that it has been more than five years since I've written an article on the subject, and I think it's a good time to revisit the subject with some practical advice on how to analyze indemnity clauses. I am not asking you to be your own lawyer, but I want to provide you with some tools to determine the risks and protection afforded to your company before you sign an agreement with an indemnity clause.
The purpose of an indemnity clause is to protect a buyer from suffering a financial loss as a result of a claim brought against it by any person or entity for injury or damage caused by a seller's product. The indemnity clause protects the buyer by allowing it to shift the loss to the seller that sold the product that cause the injury or damage.
An indemnity clause can be drafted to be buyer friendly to protect the buyer, neutral, or seller friendly. Since most indemnity clauses are drafted by buyers, they tend to be buyer friendly, which often unfairly shifts the risk of loss to the seller. The degree to which an indemnity clause is drafted to be buyer or seller friendly depends on how the clause, as drafted, answers to each of the following questions:
What losses are covered?
The usual covered losses are the damages the buyer is required to pay the injured person or entity making the claim. The covered losses may be further defined to include fines, penalties, settlement amounts, and assessments the buyer pays to the claimant. The covered losses may also include the buyer's expenses, defense costs, and reasonable attorneys' fees. Some more detailed clauses state who controls the defense of the claim and what degree of input the seller has in any settlement of the claim.
What claims are covered?
The basic covered claim is a general demand or lawsuit for money damages. A laundry list of other potential claims is usually added, for example: actions, lawsuits, claims, administrative proceedings, and criminal proceedings.
Who may make a covered claim?
The natural claimant is a customer who bought the product from the buyer. Courts have been very liberal in ruling on who may file claims for injury by a product. The clauses usually are drafted very broadly to state that the clause covers any person or entity who makes a claim. The definition may be broadened to include federal, state, or local governmental authorities and bystanders.
What types of injury or damages are covered?
Traditionally, indemnity clauses only covered personal injury, illness or death. Usually, most clauses are drafted to include a wide range of other non-personal injury damages including property damage, fines, and penalties. Then, for example, the buyer is covered if a local government fines the buyer because the product failed to meet the weight listed on the label.
What causes of injury are covered?
The covered cause of the injury can be defined in many ways. Seller friendly clauses are drafted narrowly to only cover injury or damages caused by a defective product. A defective product is then defined as a product that does not comply with any of the buyer's terms or specifications, or fails to comply with any federal, state, or local laws or regulations. Buyer friendly clauses are drafted so broadly that they eliminate the concept of the seller causing the injury. Instead, the clause covers any injury or damage that arises in any way from the delivery, sale, resale, labeling, handling, use, or consumption of the product. These buyer friendly clauses as written require the seller to indemnify the buyer for any losses that arise from its product regardless of whether the product was defective or actually cause the injury. Most indemnity clauses--whether buyer friendly, seller friendly, or natural--cover injury caused by the negligence or willful misconduct of the seller, its employees, or agents.
What causes of injury are excluded?
Buyer friendly clauses only exclude any injury or damage solely caused by the buyer. As written, these clauses shift liability to the seller even if the buyer caused 99% of the injury and the seller caused 1%! A neutral clause, at the very least, should exclude any injury or damage to the extent caused by the buyer, or the injured person or entity. A neutral clause should also exclude any injury or damage caused by the actions, willful misconduct, omissions, or negligence of the buyer, its employees, or its agents. Seller friendly clauses exclude any injuries caused by a defect in the product that occurred after delivery of the product to the buyer. Seller friendly clauses may also exclude injury cause by a product in which the buyer made any physical or chemical changes, packed or repacked, or labeled or re-labeled. The buyer's involvement or cause of the injury may not necessarily have taken place when the product was in the buyer's possession. Its involvement may have come from establishing the product's specifications or supervising its production.
Any indemnity clause can be analyzed by asking these six questions and determining how the clause answers each one. Each party's risks and protection can be adjusted by revising each provision. When entering into an agreement with an indemnity clause, it is prudent to check your insurance policies to determine whether the liability being shifted to your company in the indemnity clause is covered by your insurance policy. You should try to have your indemnity clause liability mirror your insurance coverage. Please contact our office if you have any questions regarding indemnity clauses.