Robbins: ‘Indemnity’ and ‘subrogation’ among legal terms to question (column)
Every now and again, I have to remind myself — or be reminded by a client — that not everyone speaks “law.” What are familiar terms to lawyers aren’t necessarily so to those in other walks of life. I suppose this is common to most professions. Who, other than an orthopedist, throws around terms such as ankylosis, epiphysis or recurvatum? Well, maybe you do, but not I.
In any profession, it is good to stop and remind ourselves every now and again, to the fullest extent possible, to speak in plain English and, when a term of art is called for, not only to explain it but to make sure our explanation is understood. To helpfully ask, “Am I making myself clear?” is a decent metric.
Thus it was recently with a client who asked me to explain the word “indemnity,” which had popped up in a contract. In defining and explaining it, my explanation led to also define the somewhat related word “subrogation,” both of which are common to certain kinds of contracts.
So without further ado …
How to ‘indemnify’
To “indemnify” means to compensate for damages or losses sustained and/or for expenses incurred.
An example might prove helpful.
Say I volunteer to serve on the board of directors of a nonprofit organization or homeowners association (which is technically a type of nonprofit). In so doing, I may expose myself to certain liabilities. Let’s say that I have authority to do so and enter into a contract on behalf of the organization and, somewhere along the line, things go south. One thing leads to the next and before you know it, I find myself personally named in a lawsuit. I might throw up my hands, stamp my feet and say something like, “Well hold on a blessed second. I was acting for the organization. How am I now tied up in a lawsuit? Why should I potentially be on the hook for anything?”
Well, there’s a contract provision for that.
Common to the bylaws for such an organization and others like it are indemnity provisions. Bylaws — “by” the way — are the main governance instruments for corporations, both for profit and nonprofit. Think of them as the constitution under which the entity is guided. Often, the bylaws will provide that a director or officer of the corporation will be indemnified if he or she becomes tangled up in a lawsuit so long as the suit arises from his or her duties or functions on behalf of the organization, that he or she was acting in the good faith belief that such actions were to benefit the corporation and that it was reasonable for him or her to hold that belief.
The upshot of all of this is that if the director or officer ends up being sued, the organization will pay for his/her legal expenses and, if any damages are awarded against such person, the corporation and not its agent will bear responsibility for its payment.
It is worth noting too that most times, indemnification, can be insured. In other words, when the entity is formed and insurance is obtained, it would be wise to show the potential insurer the indemnity provisions in the bylaws and to make sure that appropriate coverage is obtained.
Indemnity means protection against the results of loss borne or paid for by another. A simple example, familiar to most of us, is that insurance companies “indemnify” their policyholders against loss for such things as fire, theft and water damage. At its essence, a policy of insurance is a contract for indemnity. I suffer the loss but you pay.
Now let’s ‘subrogate’
“Subrogation” is a second cousin twice-removed.
To “subrogate” means to substitute one person in the place of another with respect to certain rights or claims. Subrogation is the assumption by a third party (such as an insurance company) of another party’s legal right to collect a debt or damages. It is a legal doctrine — and common contract provision — whereby one person is entitled to enforce the subsisting or revived rights of another for one’s own benefit.
Let’s imagine, for example, that you have been in an accident. You submit your claim to your insurance carrier to indemnify you. The insurance carrier pays for your medical bills and to put your car back to its former condition. But the insurance company also seeks subrogation.
In this example, say the accident was caused by someone other than you and you were simply the unfortunate victim in the fallout zone of someone else’s negligence. Although your insurance carrier may pay out, it will seek to subrogate the claim and put themselves in your shoes against the person ultimately responsible and, by so doing, recover from that person (or that person’s insurance carrier) the losses sustained in your behalf. By putting themselves in your shoes — substituting them for you — they can seek recovery from the real party at fault.
When you subrogate a claim, someone else steps into your shoes and has the right to recovery that previously belonged to you.
As you might imagine, indemnity and subrogation provisions are often joined at the hip in certain kinds of contracts. “I’ll pay out on your behalf, but you agree to assign to me the right to recover the losses I paid out against the true bad actor.”
Plain English. Clear explanation. Full understanding. Those should always be the goals in communication. Perhaps with a cherry on top when dealing with professionals who, too often, assume that you know what they’re talking about.
Ask questions and then ask some more, until you’re sure you understand.
Rohn K. Robbins is an attorney licensed before the bars of Colorado and California who practices in the Vail Valley with the law firm of Stevens, Littman, Biddison, Tharp & Weinberg LLC. His practice areas include business and commercial transactions, real estate and development, family law, custody and divorce and civil litigation. Robbins may be reached at 970-926-4461 or at his email address, firstname.lastname@example.org.