Indemnities: 4 Things You Should Know.

Short answer: when a customer asks you to indemnify them, remember four things. An indemnity is really an insurance policy you are writing, the standard IT version is an infringement indemnity, there is no one-size-fits-all wording, and who hires the defense lawyer matters a lot.

This may not be the most exciting topic, but if you work with any SaaS agreement you will run into indemnity issues. So here are four basics to know when a customer or partner asks you to indemnify them.

First, a quick orientation. Indemnities are those paragraphs near the end of the contract that lawyers fuss over. They usually read something like “x will indemnify, defend and hold harmless y from all claims, demands…”

1. An Indemnity Is Insurance.

As a general matter, an indemnity works like an insurance policy. So that indemnity clause is, in effect, you writing an insurance policy for your customer or partner. You are in business to provide software or a service. So ask yourself why you are writing an open-ended insurance policy on top of the product you actually sell.

2. The Infringement Indemnity.

What is typical in the IT industry is an infringement indemnity. It protects your customer if you do not actually have the rights, under copyright, patent, or trade secret law, to provide the license or access you are selling. That kind of infringement exposure is yours to own, so this indemnity is a reasonable best practice. Make sure you have the rights to your technology before you put it in the market, and this clause becomes low-risk.

3. There Is No One Size Fits All.

Read each indemnity closely. It can be very broad (watch for words like arising out of or related to) or very narrow. Most are specifically tailored, and there are few truly standard ways to draft them, so talk to your attorney.

4. Two Ways to Pay.

There are generally two payment structures in an indemnity:

• The indemnitor hires the lawyer. The party taking the risk controls and pays for the defense after being told of the claim. This is the fairer version.
• The indemnitee hires the lawyer. The party being protected picks its own lawyer and sends you the bill. This one is much tougher, because someone else is spending your money.

So push for control of the defense when you are the one on the hook. It is the difference between managing a claim and writing a blank check. Indemnity also works hand in hand with your limitation of liability; a tight cap means little if a broad indemnity sits outside it.

Frequently Asked Questions.

What indemnity should a software vendor actually give? Usually a scoped IP-infringement indemnity, and not much more. It is the exposure that is genuinely yours, and customers reasonably expect it.

Why does it matter who hires the defense lawyer? Because that party controls strategy and cost. If you are paying, you want to control the defense, not reimburse someone else’s chosen counsel.

Should the indemnity sit inside or outside my liability cap? Decide deliberately. A broad indemnity carved out of your cap can dwarf the deal value, so tie the two together on purpose.

Each indemnity is unique, so read them closely and understand the basics. Better yet, have your lawyer read them, because this is one of the most complex contracting issues out there. We draft these tightly for SaaS and software vendors so the risk stays where it belongs.

For the underlying distinction that drives most indemnity negotiations, see Indemnity vs. Breach of Contract Claim in a SaaS Terms of Service.

Disclaimer:

This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.