In this month of ghosts, goblins and all things spooky, beware of the scariest of legal terms: “indemnification.” It’s a big word with big consequences and its power is often overlooked. Here’s the 411 on the term and ways to keep it from scaring up an awful fright in your business and personal affairs:
Indemnification is a term in a contract under which a person or business takes on legal responsibility for injuries (or damages) that might otherwise belong to someone else. It arises as a result of two or more parties’ agreement to assign risks and responsibilities in a certain way.
Indemnification provisions are enforced by Michigan courts, short of egregious circumstances, because the courts recognize and support the freedom to contract. Public policy favors allowing parties to agree to allocate risks and responsibilities for damages among themselves as they see fit. Because indemnification is voluntarily given, indemnification provisions are permitted to extend liability beyond the bounds of normal legislative protections. Michigan courts have allowed employees to hold their employers liable for injuries which would otherwise have been barred from recovery by the Workers Disability Compensation Act, based solely upon indemnification provisions. The Michigan Supreme Court has even suggested that extracurricular activity providers may be able to hold parents responsible for injuries to their own children, so long as the proper indemnity is given. As long as the parties agree in writing, almost anything goes. Indemnification is a powerful tool.
What’s surprising is that these powerful indemnity provisions are often agreed upon without a second thought. They appear in many types of agreements and are often dismissed as “standard contract language.” As a result, legal protections are contracted away inadvertently and without consideration of the consequences. It’s legally frightening to be sure.
The good news is that the indemnity monster can be tamed. Thoughtful planning can address liability concerns without scaring away the deal. Indemnification provisions, when carefully drafted, can allow parties who might otherwise shy away from dealings due to concerns over possible legal consequences, to agree upon risks up front and move forward. Michigan courts will enforce only the express words used by the parties to a contract, and nothing more, when determining the conditions of and extent to which indemnity may be required. That puts the power back in the parties’ hands.
So, the next time you encounter the indemnity monster, stop and think through these questions before you sign on the dotted line: Are you comfortable with the conditions that trigger assumption of the added risk? Does the provision define the boundaries of what is and is not assumed? Do you understand your rights and obligations? And most of all, do you agree to take on the added potential for liability should things go wrong? Knowledge, careful thought, and of course a well-versed contract attorney, can turn the indemnity monster into a friend.