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Indemnities: 4 Things You Should Know.

While this may not be one of the most exciting topics, if you work with any type of Software EULA or SAAS contract (or SAAS Distribution Agreement) you will (or have) run into indemnity issues. I thought I would break this down into 4 basic issues you should know when your customer/partner asks you to indemnity them.

Before we get started, as you probably know indemnities are those pesky paragraphs (near the end of the contract) that the lawyers seem to get caught up with.

They usually have wording similar to:

“…x will indemnity, defend and hold-harmless y from all claims, demands….”

So let’s get started.

1) Indemnity = Insurance. As a general matter, an indemnity is the same as an insurance policy, so that indemnity clause in your agreement is as if you are writing an insurance policy for your customer/partner. You are really providing software or a software service, so why are you writing an insurance policy on top of that? Exactly. That is the way you should think about it, as you are providing technology, not selling insurance.

Here is few words from the ‘Insurance Liability Wiki.’

2) Infringement Indemnity. On the other hand, what is typical in the IT industry is to provide an ‘infringement type indemnity’ (i.e. protects your customer/partner if you don’t have the necessary rights under copyright, patent, or trade secret law) to provide the license or access to your technology (that seems fair). I realize that this may make you queazy, but this is pretty much a best practice as the technology vendor should make sure they have the necessary rights to the technology before they provide it to the market place. In all other situations, you need to think a lot harder about this issue.

3) There is No One Size Fits All. Read each indemnity closely, as it could be very broad (e.g. you see words like ‘arising out or related to‘) or very narrow. Remember to talk to your attorney, as most indemnities are specifically tailored/drafted, and there are very few standard ways of drafting them.

4) Two Ways to Pay. I think there are generally two types of payment obligations as part of an indemnity (I am trying to simplify this):

(a) An indemnity where the Indemnitor (company taking the risk) hires the attorney to defend the claim, and
(b) an indemnity where the Indemnitee (company being protected) hires the attorney to defend them against the claim.

The first one is a little more fair as the party that will be footing the bill will hire the attorney after they are informed of the claim. The second one is a lot tougher as if the other party thinks they have a claim covered by the indemnity they could hire their own attorney and send you the bill.

So long story short, each indemnity is really unique and you need to read them closely, and at least understand the basics about them. Oh yea, it is always better/advisable to have your lawyer read them, as this is one of the most complex (maybe the most complex) legal contracting issues out there.

Disclaimer: This is provided for educational and informational purposes only, and is not legal advice. Talk to your attorney for legal advice, as they should consider the pertinent facts and applicable law before providing any advice.