How to Write an Indemnity Agreement (Step-by-Step Guide)

An indemnity agreement has two parties: 

• Indemnitor: The party that holds another harmless in a contract
• Indemnitee: The party that is protected by the indemnitor against liabilities

Writing an indemnity agreement depends on whether you are the indemnitee or the indemnitor. As the indemnitee, you want a deal that protects you against all legally enforceable liabilities. If you are the indemnitor, ensure the agreement holds you liable only for breach of contract and negligence acts. 

Use the following 7 steps to write an effective and legally binding indemnity agreement.

1. Consider the Indemnity Laws in Your Area

Indemnity laws define how much risk can be transferred between parties in a contract. You should consider this when identifying the state statutes to govern your indemnity agreement. 

Indemnity laws vary by state. For example, in some states, a clause in an indemnity agreement may be considered void if it fails to meet certain requirements. Some states even have anti-indemnity statutes.

Taking the time to consider the relevant indemnity laws in your area ensures your indemnity agreement is properly structured and offers adequate protection to  both parties.

2. Draft the Indemnification Clause

The indemnification clause is the heart of an indemnity agreement. In this clause, you state the liabilities the indemnitee will be protected against. Ensure the wording is precise and only open to one interpretation (unambiguous), especially if your organization is the protected party in the agreement. Ambiguity in a contract is usually resolved in favor of the indemnitor. 

The clause should outline that the indemnifying party agrees to defend and hold the indemnitee harmless in particular circumstances. 

3. Outline the Indemnification Period and Scope of Coverage

Outlining the indemnification period and scope of coverage is an essential part of this process. The indemnification period is the duration in which the agreement will protect the indemnitee from claims and legal actions. This period can be defined as a specific length of time, such as five years, or it can be indefinite. Again, it’s important to be specific in your definition of the indemnification period. 

The scope of coverage refers to the circumstances under which the indemnification clause will apply. As the party providing liability protection in the agreement, ensure you only take on liabilities caused by your organization’s actions. 

4. State the Indemnification Exceptions

This section specifies conditions under which the indemnitor will not protect the indemnitee. These conditions vary depending on the agreement’s nature. However, most indemnity agreements outline that the indemnitee will not be indemnified if: 

• The party knowingly commits a crime
• The indemnitee acts unreasonably or in bad faith
• The indemnified benefited from the risk that occurred 
• The indemnitee gets fully compensated by other legal means

These are just a few examples of indemnification exceptions. Brainstorm others that are specific to your circumstances. 

5. Specify How the Indemnitee Notifies the Indemnitor About Claims

An indemnity agreement should reveal how the indemnitee will notify the indemnitor of a dispute or claim covered under the legal document. That way, the indemnified party won’t be in the dark when facing losses, damages, or legal issues. You should also outline how the indemnitor defends the indemnified party against the claims, ensuring the agreement is comprehensive. 

6. Write the Settlement and Consent Clause

This clause outlines how both parties in an indemnity agreement must get each other’s consent before settling a claim covered in the contract. The clause ensures the indemnitor doesn’t settle allegations in a way that imposes a penalty or limitation on the indemnified without written consent. It also ensures neither party unreasonably delays consent to the proposed settlement. 

7. Outline How to Enforce the Agreement

It’s important to make sure that the agreement is enforceable in case something goes wrong. Therefore, the indemnity agreement should include a specific process for handling disputes and resolving disagreements. This process should be clear and easy to understand, so both parties know what to expect when issues arise.