INDEMNITY

The fact cannot be held for denial that construction industry is a fantastic competitive
marketplace. Contracts used to find plenty of works requiring them for as long as surety
bonds guarantee their performance of the contract and watch out for supporting a balanced
flow of work. Indemnity bonds are the ones required by the contractors on various public
projects that are being handled by the state, federal or government agencies.

Indemnity is a three-party concept. The three parties are known as the “indemnitor”, the
“indemnitee”, and the “claimant”. For example, an indemnity clause will typically require
the prime contractor to indemnify the owner against claims made by an injured worker. In
this case, the injured worker is the “claimant”, the contractor is the “indemnitor” and the
owner is the “indemnitee”.

And indemnity Bond, is a bond created to protect the oblige against the breach of contract by
the second party (the principal). It is a promise by a guarantor to pay one party (oblige) a
certain amount if other party is not able to fulfil the terms of the contract.

The role of bond is to protect the first party against losses that occurs as a result of failure to
meet the obligation by the principal. Also known as a surety bond, an indemnity is considered
as a third- party agreement involving the oblige, the principal and the surety.
Indemnity can be defined as “a duty to make good any loss, damage or liability incurred by
another,”
Or alternatively “the right of an injured party to claim reimbursement for its loss, damage or
liability from a person who has such duty.
Indemnitee definition, a person or company that receives indemnity.
Indemnitor. The person or organization that holds another (the indemnitee) harmless in a
contract.
Indemnity (against something) is protection against loss or damage, especially in the form of
a promise to pay for any loss or damage that occurs. If something goes wrong and the
indemnified party suffers losses, the indemnifying party will cover the full extent of the loss,
almost as if the indemnifier were acting like an insurer. It is not possible to define, in
general, the exact content of indemnity clauses, as this will depend upon the wording of each
individual contract.
If the indemnification clause is not carefully drafted, the indemnitor stands to incur a
substantial loss by assuming a responsibility for all risks, including damages arising from the
sole negligence of the indemnitee. On the other hand, if an indemnification clause is too
broad, it may be declared void and unenforceable under a state’s anti-indemnity law.

For example, a state court may decline to enforce an indemnity clause that purports to
indemnify a person’s loss from that person’s intentional or wilful misconduct. 
It is essential that the agreement itself describes the types of losses being covered including
legal fees.it is also essential that the agreement identifies the scope and extent of the
indemnification.
Difference between indemnity and guarantee
1) In the contract of indemnity, one party makes a promise to the other that he will
compensate for any loss occurred to the other party because of the act of the promisor
or any other person. In the contract of guarantee, one party makes a promise to the
other party that he will perform the obligation or pay for the liability, in the case of
default by a third party.

2) In indemnity, there are two parties, indemnifier and indemnified but in the contract of
guarantee, there are three parties i.e. debtor, creditor, and surety.
3) The purpose of the contract of indemnity is to save the other party from suffering loss.
However, in the case of a contract of guarantee, the aim is to assure the creditor that
either the contract will be performed, or liability will be discharged.

Difference between indemnity and warranty

The word “indemnity” is sometimes misused in construction contracts by those who attempt
to build additional protection into an indemnity clause by including a promise to “indemnify”
against defective workmanship and materials. In this circumstance, it would be “warranty”
and not “indemnity”. A warranty is an agreement that work and materials will be of
workmanlike and merchantable quality, whereas an indemnity is an agreement to protect the
“indemnitee” against third-party claims.

It is possible that a third-party claim could arise out of defective material. For example, a
worker might sustain injury because of a defective rafter. An indemnity clause would protect
the owner against the worker’s claim, while a warranty clause would cover the cost of
repairing the rafter. Indemnity problems dealing with bodily injury or property damage on the
job site are best handled by insurance. If the contractor or “indemnitor” obtains coverage
denoted “blanket contractual” or “liability assumed by contract”, the insurance company of
the “indemnitor” is required to defend him in the event of an accident. Many indemnity
clauses in construction contracts are supported by insurance clauses that require the
contractor, or “indemnitor” in this case, to carry appropriate coverage and provide proof of
this coverage. The overall effect is to transfer the risk from the (owner’s) “indemnitee’s”
insurance carrier to the (contractor’s) “indemnitor’s” insurance carrier. Most insurance
policies cover bodily injury and physical injury to tangible property. However, sometimes
claims arise out of other indemnity issues. Let’s say for instance, that a contractor makes a
claim against an owner, alleging that the owner negligently supplied unbuildable drawings.
Here we have a claim arising out of the work against an owner who (in this case) is an
“indemnitee” under the prime contract. In this case, the claim would not be covered by
insurance against bodily injury to tangible property (as there was no bodily injury). A
broadly-worded indemnity clause could be interpreted to cover such claims.
Types of indemnity clauses
Every indemnity agreement should be prepared accordingly to the kind of project being
executed. The most common indemnity clauses are;
1. Broad form indemnity
Under this clause, the indemnitor is responsible for his negligence as well as the
negligence of the third party. This means that he/she may be liable for the sole negligence
of the indemnitee.
For example, in a construction contract, let’s say a subcontractor A agrees to
indemnify the general contractor B. The subcontractor is hired to do tile work on a
commercial building, and as the tile work turns out to be defective, the general
contractor incurs liability towards the owner.
Another example is where contractor A and contractor B agree to an indemnity clause
where A is to indemnify B against any loss or liability with respect to personal injury,
in relation to the execution of the contract. If in this case B was to injure one of A’s
employees, B has the right under the agreement to be indemnified by A, effectively
making A bear the liability towards the employee.
2. Intermediate form of agreements
This one puts the indemnitor assuming all the risks associated but not if the risk is the
indemnitee responsibility. It is the referred clause in the construction industry and could hold
the owner harmless from any claims, caused by negligent acts or omissions of the owner. It
requires all-or- nothing indemnification.
3. Comparative form clause
This one requires a comparison of negligence. Under this clause the indemnitor is held
responsible for the loss caused by their proper actions. This type of agreement is based upon
common law principals. the indemnitor is not liable for direct negligence committed by the
indemnitee. One party agrees to indemnify the other against liability that other may have
against him. In the building enterprise and the oil and gas industry, agreements containing
reciprocal indemnity clauses between the operating parties are common. This way, each party
bears the risk of loss or damage to property, injuries or death to his own side.

When to use indemnity clauses.

 Breach of contract
 Liability of negligence
 Compensation due to injuries or property damages
 Claims for loss
 All types of infringement
 Legal costs or related expenses
 Loss of profit
 Taxes and interests’ payable by a contractor declared on default
Rights and duties of an indemnifier
The rights of an indemnity holder are the duties of the indemnifier and vice versa. The
indemnifier is not liable if;
i. The indemnity holder acts negligently
ii. The indemnity holder is acting with the intention of causing loss or damage
iii. The indemnity holder is acting against the instructions of the other party.

Duties of the indemnifier

The duties arise in these circumstances;
 There must be loss in accordance with the contract to make the indemnifier liable
 There must be an occurrence of the anticipated event. Without any occurrence of the
prescribe event, there is no indemnity by the indemnifier
 When the right of indemnity is used by the indemnity holder prudently and the
instruction of the indemnifier is not contravened or when there is no breach of
contract
 If the costs demanded by the indemnifier are not caused by negligence, haphazard
behavior
Rights of indemnity holder are as follows
i. To recover entire indemnity amount prescribed in the agreement of contract
ii. To claim all damages compelled to pay to a third party for loss
iii. To claim all costs spent in relating to indemnity
iv. To claim all costs for legal action

What Are Indemnification Clauses Intended to Do?

Simply put, indemnification clauses are utilized to shift risk from one party to another.
Commonly, the service provider (in this case, an architect, engineer, or construction manager)
is asked to assume the liability of the client/project owner for claims and expenses arising
from the service provider’s work undertaken for the client. In concept, this seems reasonable
in that the party performing the services should bear the risk related to their negligent
performance of the work. However, in practice, some owners seek to shift additional risk that
is beyond the control of the design professional or that extends beyond basic negligence-
based liability.