Indemnification is a contractual method of transferring risk. Through indemnification provisions, one party, called the "indemnitor," agrees to take financial responsibility for certain risks that otherwise would have to be paid by the other party, called the "indemnitee." In legal terms, the indemnitor agrees to "indemnify and hold harmless" the indemnitee from payment of any damages that result from acts of the indemnitor.
Example: County contracts with Painting Contractor to paint a County building. An indemnification clause in the contract requires the Painter (the "indemnitor") to defend and hold harmless County (the "indemnitee") from any damages arising from the acts of Painter in performing the contract. Painter drops a bucket of paint on a County customer. Customer sues Painter and County. Without an indemnification clause, both Painter and County would have to defend the suit and damages might be awarded against each of them. If there is an indemnification clause, Painter must defend herself and also defend County and also pay any damages that might be awarded against County because of what Painter did.
There are three general approaches to indemnification.
Broad Indemnification: The indemnitor agrees to take financial responsibility for any type of liability or loss that occurs under the contract, regardless of who is at fault.
Limited Indemnification: The indemnitor agrees to take financial responsibility only for the indemnitor's actions under the contract and those of the indemnitor's subcontractors, agents and employees. This form of indemnification will usually require the indemnitor to be financially responsible for injuries where the indemnitor's actions are the whole cause or partly the cause of the injury.
Mutual Indemnification: Each party to the contract agrees to indemnify the other for their respective actions under the contract. Each party then "indemnifies and holds harmless" the other for any loss or liability the other incurs because of its actions under the contract.
An agreement to indemnify usually also includes an agreement to defend the other party. Thus, if a County agency has a claim or action brought against it because of some act of a contractor during the performance of a contract, the agency can require the contractor to pay the cost to defend the County. The legal term of this is to "tender the claim" to the contractor. This provision can be especially important because the County is often named as a defendant in lawsuits against contractors over contracts in which the County had little or no active role. The County is often regarded as a "deep pocket," more likely to be able to pay damages than a small contractor. However, if the County determines that it has significant exposure in a claim or action, it generally will choose to handle its own defense rather than tender it to the contractor.
CONTRACTOR agrees to indemnify, defend, and hold harmless the COUNTY, [the State of Oregon,][and other funding sources] and its [their] officers, agents and employees against all liability, loss, and costs arising from actions, suits, claims, or demands arising from performance of this contract.
This broad provision is the preferred provision from the County standpoint, because it affords the maximum protection. The provision is one-sided and may appear inequitable on the surface. In fact, the provision is reasonable when the contractor is performing the activity that creates the risk, while the County's only contractual duty is payment. If the County fails to pay, the contractor can sue for payment under the contract. Should the contractor fail to perform or perform negligently or with criminal intent, however, the County could be sued by any injured or allegedly injured party for damages far in excess of the contract payments.
CONTRACTOR agrees to indemnify, defend and hold harmless the COUNTY [The State of Oregon][and other funding sources] and its [their] officers, agents and employees against all liability, loss and costs arising from actions, suits, claims or demands attributable in whole or in part to the acts or omissions of CONTRACTOR, and CONTRACTOR's officers, agents and employees, in performance of this contract.
In this provision, the Contractor's liability extends only to loss or liability arising in whole or in part from its actions. In contrast, in the broad provision the Contractor is agreeing to cover the costs of any loss or liability arising under the contract, whether or not the County was also at fault, or even entirely at fault.
This type of provision is obviously less one-sided and is appropriate in situations where the County agency has a larger role in performance of the contract. For example, a County agency might screen a client for referral to a professional provider, and provide follow-up. In this instance, the contractor is understandably reluctant to provide full indemnification for risks it cannot control.
In a variation of this form, Contractor may agree to indemnify only for loss or liability arising "solely and exclusively" from its activities under the contract. Usually Contractors' professional insurance will not cover a provision any broader than this. Whether an agency will want to contract under these conditions depends on the factors discussed below in "Discussion."
In another variation of this form, Contractor may agree to indemnify for loss or liability arising from Contractor's negligent acts or omission.
CONTRACTOR agrees to indemnify, defend and hold harmless the COUNTY [The State of Oregon] [and other funding sources] and its [their] officers, agents and employees against all liability, loss and costs arising from actions, suits, claims or demands attributable solely and exclusively to acts or omissions of CONTRACTOR, and CONTRACTOR's officers, agents and employees, in performance of this contract.
Subject to the limitations of the Oregon Tort Claims Act and the Oregon Constitution, COUNTY agrees to indemnify, defend and hold harmless the CONTRACTOR [The State of Oregon] [and other funding sources] and its [their] officers, agents and employees against all liability, loss and costs arising from actions, suits, claims or demands attributable solely and exclusively to acts or omissions of COUNTY, and COUNTY's officers, agents and employees, in performance of this contract.
In this type of indemnification, each party indemnifies the other party for loss or liability resulting from its own actions under the contract. In states with joint or comparative fault negligence schemes, this provision may do no more than reiterate the law (that is, "if you're found liable, you'll pay; if I'm found liable, I'll pay; if we're both liable, we each pay our part").
However, these provisions also allocate defense responsibilities, which can be costly even if no liability is ultimately established.
These "mutual" or "reciprocal" indemnification provisions are frequently used in intergovernmental agreements, subject to limitations in the Oregon Tort Claims Act and the Oregon Constitution. However, they should not be entered automatically with other governmental bodies if there is any question about the status or stability of the entity. The County normally does not agree to indemnify private parties or entities. This position is based partly on historical bargaining strength, but also on issues involving use of public funds. Any indemnification agreement by the County must be subject to the limitations the Oregon Tort Claims Act and the Oregon Constitution. An agency must not under any circumstances enter such a contract whereby the County assumes liability without prior discussion with both Risk Management and County Counsel.
A primary purpose of this section on indemnification is to make the selection of an indemnification clause as routine as possible. Nonetheless, a risk analysis of each new contract situation is necessary. The types of factors to consider include the nature of the work to be performed, the numbers and types of people or entities affected by the work, any known data on the frequency of claims for the type of work involved and the contractor's history. The question to answer is how much risk is the agency undertaking in entering into this contract with this provider? If the agency is considering executing a high-risk contract with narrow or no indemnification, the proposed decision should be discussed with Risk Management.
In some cases, contractors may refuse to indemnify the County under any circumstances. At this point, the decision becomes a policy determination; that is, is there a reason to contract with this particular contractor that outweighs the risk incurred? These decisions should be weighed with Risk Management and possibly higher levels if the risk is significant.
Some funding sources (e.g. Oregon Mental Health and Developmental Disability Services Division) require that the County require its subcontractors to indemnify the County and the State. Should the County fail to require the Contractor to provide indemnification in these cases, the County will be obligated to indemnify the State for the County's Contractor's activities should a problem arise.