What is Indemnification

If you have browsed through legal contracts between two parties or reviewed the agreement of your life insurance, it is highly possible that you have already chanced upon an indemnification clause or agreement. The clause and term can be used in any contract but changed in many ways. However, the gist of it comes from its root word “indemnity”. Indemnity refers to a legal philosophy where one party agrees to release the other party from financial liabilities for any loss or damage resulting from the product or services provided by the first party.

An indemnification clause or agreement that is signed by both parties releases the other party from financial liabilities and indemnity should unfortunate things happen resulting from the use of a rented or sold product or service. For example, if you rent a car from a rental agency, they will have you sign a renter’s contract where it will stipulate that if in case you damage their property while in use, you will be liable to compensate them for the damages. However, an indemnification clause in the renters contract which you signed will release the rental agency from any financial liability should you encounter an accident while riding the car. In this case, the rental agency will not be liable to pay for your hospital bills and any other compensation to ease your suffering both physically and emotionally. If this happens to you, your best bet is to sure the car manufacturer if the accident occurs due to a faulty mechanism in the car.

Most organizations and parties entering a legal contract stipulate the clause in a contract just in case the worst happens. However, the chances of an unfortunate incidents leading to heavy compensatory liabilities rarely happens. Nevertheless, it is very important that each contract should have an indemnification clause inserted especially if the party providing the product or service wants a risk-free contract.

An indemnification clause can be invoked and activated for third party claims as well. For example, if you rented a car from a rental agency without showing a proper driver’s license and you signed an indemnification agreement that releases them from liability, then even if you hit your friend’s car, the rental agency cannot be sued by your friend for allowing someone as incompetent as you to rent one of their cars. The reason behind that is due to the indemnification agreement that you signed releasing them from any liabilities you may cause while using the car.

Indemnification clauses normally win any other legal discussion or argument. Courts of law will always hold a signed indemnification agreement as a solid release of liability. This is the reason why many organizations, corporations, and businesses make full use of an indemnification clause in all of their contracts with clients and suppliers.

Lawyers are your best resource to ensure that the indemnification clause or agreement that you want to enforce in every business transaction is properly worded. In fact, it is vital that you consult a lawyer because if the agreement or clause is poorly worded or vague in overall meaning, it can translate to the nullification of the agreement when presented to a judge to settle a legal dispute. The wording and legal language must be as solid as oak to prevent liabilities that could potentially lead to bankruptcy and financial ruin.


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