Indemnities: 4 Things You Need to Know

While this may not be one of the most exciting topics for companies seeking growth capital or a venture capital investment, it’s an important issue for every software or IT business executive. Here are 4 things you should remember when your customer/partner is asking you to indemnity them.

Before we get started, as you probably know, indemnities are those pesky paragraphs (near the end of the contract) lawyers seem to get caught up with.

They usually have wording similar to:

“…x will indemnity, defend and hold-harmless y from all claims, demands….”
 So let’s get started…
1) Indemnity = Insurance. As a general matter, an indemnity is the same as an insurance policy. That indemnity clause in your agreement is the same as if you were providing insurance to your customer or partner. You are providing software or a software service, so why are you writing an insurance policy too? Exactly. That is the correct way to view the situation; you are providing technology, not selling insurance.

Here are a few words from the ‘Insurance Liability Wiki.’ They also refer to insurance as an indemnity. 

2) Infringement Indemnity.  On the other hand, what is common (in this industry at least) is to provide an ‘infringement type indemnity’ (i.e. protects your customer/partner if you don’t have the necessary rights under copyright, patent, trade secret or other proprietary rights) to provide the license or access to your technology (that seems fair). I realize this may make you queasy, but it is a best practice. The technology vendor should make sure they have the necessary rights to the technology before they provide it to their customers/partners. For all other types of indemnities, you need to really think about whether you want to provide that insurance (I mean indemnity). 

3) One Size Fits All Does Not Exist. Read each indemnity closely, as it could be very broad (e.g. you see words like ‘arising out or related to’) or very narrow. Remember to talk to your attorney. Most indemnities are specifically tailored/drafted, and there are very few standard ways to draft them. 

4) 2 Ways to Pay. An indemnity generally includes two types of payment obligations (I am trying to simplify this):

(a) An indemnity where the Indemnitor (company taking the risk) hires the attorney to defend the claim, and
(b) an indemnity where the Indemnitee (company being protected) hires the attorney to defend them against the claim. The first one is a little fairer because the party footing the bill will hire the attorney after they are informed of the claim. 

The second one is a lot tougher, for the other party thinks they have a claim covered by the indemnity. They could hire their own attorney and send you the bill.
 Long story short, each indemnity is really unique and you need to read them closely, and at least understand the basics. This is one of the most complex (maybe the most complex) legal contracting issues so it is always better/advisable to have your lawyer read them. This is just a few thoughts from someone who serves as a venture capital advisor to OpenView’s portfolio of expansion stage companies. 

Disclaimer: This is provided for educational and informational purposes only, and is not legal advice. Talk to your attorney for legal advice, as they should consider the pertinent facts and applicable law before providing any advice.