Indemnification Clauses: What Are They and Why Do They Matter?
Indemnification clauses are crucial in forming beneficial contracts. How can they help—or come back to bite you?
If you have ever looked at a contract, you may have noticed a section entitled “indemnification.” But what does this word mean? Who uses it, and why? Does it mean that no one can bring a lawsuit? Take note: an indemnification clause can have a significant impact on your contract. That is, understanding who benefits (and how) can change the course of contract negotiations.
Let’s start with an example. Stacy has developed new electronic medical records (EMR) technology platform for use in a private practice. Adam is a physician in private practice and wants to use the EMR to streamline patient file storage. Stacy and Adam ask their attorneys to prepare a contract. Because of the sensitive nature and the potential risks of loss of patient information, this contract contains indemnification clauses.
What Is an Indemnification Clause?
Typically, each person who signs a contract is responsible for their own actions to each other and third parties who have not signed the contract. Using our example, Stacy is responsible for ensuring that hackers do not steal patient data from her web servers. Adam is responsible for having a strong password such that only authorized people in his practice have access. In either case, a patient or regulators could bring a claim against one or both for the loss of patient data. Such a claim could result in severe consequences for Stacy, Adam, or both.
Here’s where an indemnification clause can come into play. By using an indemnification clause, Stacy and Adam could agree that Stacy is entirely responsible for any claims from patients, regulators, or others relating to the loss of patient information. Therefore, the effect would be to reduce Adam’s potential liability and increase Stacy’s.
In other words, an indemnification clause shifts liability from one person to the other.
How Do You Identify an Indemnification Clause?
One of the trickiest aspects of indemnification clauses can be identifying them in contracts. Many contracts allow for easy identification, using specific language that acts as a red flag to the reader. Such clauses include the words “defend,” “hold harmless,” or “indemnify.” For example, here’s an indemnification clause you may see in a contract between Stacy and Adam:
Stacy shall defend, indemnify, and hold Adam, and his officers, employees, and volunteers harmless from any and all claims, injuries, damages, losses or suits including attorney fees, arising out of or resulting to this contract between Stacy and Adam.
Also, pay attention to who is writing the contract. Often, the person who prepares the contract writes it for their own benefit and therefore tries to release themselves from liability by requiring indemnification from the other party.
Why Does Indemnification Matter?
The risk of lawsuits poses a serious and ever-present threat to healthcare professionals. Therefore, the ability to shift liability away from oneself is usually desirable. Indemnification clauses can protect you and your business from lawsuits and serve as a deterrent, even against strong cases. Note, though, that physicians cannot waive their responsibilities to their patients.
Carefully crafting an indemnification clause to shield yourself and your business from liability can impact whether you will be held personally responsible.
An experienced lawyer, such as the healthcare attorneys at Jackson LLP, can prepare or review contracts with your goals and best interests in mind. If you’re a healthcare professional, practice, or business owner in one of the states that we serve, book a free consultation to learn how we can help you.
This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.