Indemnity agreements can save

Contracts involving the sale of services or products usually have language that protects against loss or damage and provides for the payment of attorney fees and court costs to the party seeking to enforce the agreement.

John McCoy

In the propane industry, these indemnity clauses take various forms. One of the most important ones addresses liability that may arise in a lawsuit by an injured third party.

Most commonly, each side agrees to indemnify the other for their own negligence. For instance, if a propane wholesaler sells to a retail marketer, the wholesaler might seek indemnity for negligence in the sale of the propane causing injuries to a consumer.

Each state has slightly different rules on if, and how, these agreements are enforceable. A majority of states allow enforcement of these agreements, provided the language of the indemnity is clear and unambiguous.

Some states require the use of certain words such as “negligence” to be enforceable. Some states – such as New York and New Jersey – don’t require this magic language, but it is still worthwhile to consider using it to meet the clear and unambiguous test to be enforceable.

Some states – such as Pennsylvania – permit indemnification of your own negligent acts even if they are considered to be grossly negligent. Most states would not allow the extension of the indemnity to cover conduct that is considered grossly negligent.

There does not appear to be any states that allow indemnification for intentional acts.

State laws also vary as to when the indemnity agreements may be enforced. Some allow the contracting parties to raise the issue during the course of the underlying lawsuit that triggers the terms of the indemnity. Others only allow it after the party seeking indemnification has made payments for which he or she can seek reimbursement.

Finally, an indemnity agreement is only of value if there are assets that may be exposed. This is commonly liability insurance.

Contracts that contain indemnity agreements should include reference to the need for the parties to carry liability insurance in a specific amount, naming the indemnified party as an additional insured or named insured for liability purposes. Proof of insurance should also be required via a Certificate of Insurance, which is provided by an insurance agent.

Contractual relations are a part of every business. As you draft or review your own contracts think about the possibility of including indemnity language to protect yourself.

Also, look to this language in contracts you are about to sign and make sure you can live with what is being asked of you.

It is always easier to negotiate before you sign the contract than after the ink has dried on the bottom line.

John McCoy is a trial lawyer with the firm of McCoy & Hofbauer in Waukesha, Wis. A founding member and past president of the Propane Gas Defense Association, he specializes in catastrophic fire and explosion cases and product liability disputes.