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Indemnity agreements explained

Rohn K. Robbins,

As much as this may stretch your imagination, as unlikely a scenario as it may seem, say you mess up. Big time. You left the barn doors of some commercial transaction open and not only are the cows never coming home, they paraded, sadly lowing, before a semi driver on the graveyard shift who misplaced his No Doze. And now the herd is (forgive the metaphor) hamburger on the skillet of the interstate. What’s a body to do?Well, you, if not the cows, just might be in luck. That is if you were indemnified.Indemnity is a collateral contract or assurance, by which one person engages to secure another against a potential loss, or to prevent him or her from being damnified by the legal consequences of an act or forbearance on the part of one of the parties or some third person. Oh. Say what? Okay, in English then. Indemnity means that someone not a party to a transaction (say you, for example) agrees to be responsible for something one of the parties to the transaction (say me, for example) does to mess up the transaction. A party to a transaction may also indemnify the other party for losses for which the indemnified party would otherwise be liable. In the case above (let’s call it the “cow case”), if you were indemnified, the indemnifying party, instead of you, would be responsible to the other party for the hamburger helper on I-70. Cool, huh? It’s sort of like institutionalized parenting. I spill my milk and cookies all over the neighbors’ gazillion dollar Andean alpaca wool carpeting and you, not me, foot the bill for the steam cleaning.Indemnity imparts that liability (that is, legal responsibility) for a loss is shifted from the person who, in the absence of the indemnity, would be responsible, to another party. Okay, here you scratch your head. Absent filial affection (read that parental love), why would someone agree to indemnify someone else? Well, there are at least two good reasons. First, shocking as the concept may be, some businesses are actually in the business of indemnifying others. Complete strangers, even. These businesses are called insurance companies. You’ve cursed at them no doubt when you’ve had to pay your premiums, or when you’ve had a loss that you’re pulling your hair out over in order to get them to pick up the tab. Insurance, in the classic way most of us think about it (expletives, of course, deleted in deference to this being a family paper), is, fact an agreement for indemnity. Instead of “like a good neighbor” or some other jingoistic drivel, what accurately could be recited as the spinal column of insurance is this, “you screw up, we pay.”Okay, let’s work our way through this one. Say the “transaction” I alluded to two paragraphs above is that I’m tooling around town in my pathetic, gas-guzzling SUV. Say, too, that the way I “mess up” is to tool my car through a red light and thence into the sparkling skin of your more-expensive-than-gold-bullion Lamborghini. You hop out, hopping mad, from your 600 horse-power phallus-with-wheels, and I throw up my hands, breathing steadily and easily. This one’s not on my nickel, I know. The insurance company, who has issued me a policy of indemnity insurance in exchange for my faithful payment of premiums is picking up the tab. Whew!Another good reason that someone might indemnify someone else is in order to induce the indemnified person to enter into an agreement that is, in one way or another, important to the person doing the indemnifying. Say Mr. A owns some property that he want to develop into a retail center. Say Mr. B is a general contractor. Say C, D, E & F are all subcontractors who will only work on A’s project if B indemnifies them. Well, if B wants the contract with A badly enough, and if he can’t find subcontractors he wants to work with other than C, D, E & F, he might capitulate to C, D, E & F’s demand that he indemnify them as to some or all of the losses they might suffer at the hands of A if A does not abide by his contractual obligations. In this way, relieved of the burden of screw-ups, C, D, E & F march happily off to work on the project of construction and B gets what he wants, that is the contract to build A’s retail park.The term, “indemnity” is also used to denote the compensation given to make the person whole from a loss already sustained. If, for example, your Lambroghini is a total loss, the money paid to you by my insurance company to replace it is the indemnity which is paid.Boiling it all down, indemnification is the means by which a victim of a loss is restored to his or her former, pre-loss, glory by the payment, repair or replacement of the thing which is lost or damaged. It is a process by which the bad-actor (that is the person responsible for the loss) is held harmless for his or her own act. In fact, the word “indemnity” arises from the Latin “indemnis” which means “without hurt” or “without harm.” It is one of the underpinnings of commercial insurance, and a legal concept without which business simply could not get done. In purchasing insurance which indemnifies the buyer, the buyer is capable of undertaking transactions which would otherwise be prohibitive. It allows one to buy, for a fraction of what the loss itself might prove to be, assurance that whatever losses might accrue are covered.So, you see, indemnity, not love, makes the world (at least the commercial world) go round. Still, prevention is always the better course. So make sure and bolt the barn doors when the milking and the chores are done tonight.Rohn K. Robbins is an attorney licensed before the Bars of Colorado and California who practices in the Vail Valley. He is a member of the Colorado State Bar Association Legal Ethics Committee and is a former adjunct professor of law. Robbins lectures for Continuing Legal Education for attorneys in the areas of real estate, business law and legal ethics. He can be heard on Wednesdays at 7 p.m. on KZYR radio (97.7 FM) as host of “Community Focus.” Mr. Robbins can be reached at 926-4461 or at robbins@colorado.net


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