A “hold harmless” or “indemnity” obligation is either a statutory or contractual obligation of one party (indemnifier) to compensate for the loss suffered by another party or parties (indemnity holder) due to the acts of the indemnitor or, depending on the wording of the agreement, acts or claims of third parties, whether valid claims or not.
One normally finds indemnity clauses in contracts involving business transactions or sale of a business interest to another, but they are also common in insurance agreements, construction agreements, and various service agreements.
Agency can create an obligation on the part of the agent to indemnify the principal or, conversely, a principal may be obligated to indemnify the agent for liabilities incurred while carrying out responsibilities on behalf of the principal. Further, some employment or fiduciary positions held can create a duty to indemnify those to whom one has a fiduciary duty if one’s actions were in dereliction of one’s duties.
Indemnity is normally a concept developed and imposed by the local jurisdiction. Thus, each state has its own law of indemnity, as do most countries. Basic concepts of indemnity, however, are common to most indemnity obligations.
Indemnity versus Other Obligations
Obligation Based on Negligence:
If one has a duty to a person or persons and fails to protect that person or exposes that person to liability due to failure to perform that duty in a reasonable manner, then one is negligent and one may be found by a trier of fact to be liable to the person for the results of that negligence, “damages.” This is not based on contract but on the duty of due care. Thus, if I drive an automobile negligently and cause you physical damage, I may be liable to pay the damages you suffered.
Obligation Based on Warranty:
A warranty is usually a contractual obligation to provide a good or service of a specified represented quality or quantity. It may be imposed by statute as well. An indemnity provides compensation equal to the amount of loss to the indemnity holder in the indemnity contract, while a warranty provides compensation for the reduction in value of the acquired asset or service due to the warranted fact being untrue. (Note that this warranty is common in real estate purchase agreements and if there is no diminution of value in the property there are no damages.)
One point to remember is that warranties usually do not cover problems known to the beneficiary at the time the warranty is given since the beneficiary was aware of the risk and diminution of value and still made the deal. However, indemnities do cover such liabilities since that is precisely why they are entered into, namely, to contractually shift the loss anticipated. As an example, if I am selling you a business and I know there is a chance third parties may sue the business and we enter into an indemnity agreement in which you indemnify me for those anticipated losses, then you still are liable regardless of my prior knowledge.