While a business contract can be complex, this is often necessary so that you do not end up liable for actions that you are not responsible for. This is why many contracts contain indemnity and indemnification provisions.
While these terms appear similar to each other, they each contain different obligations depending on whether or not a contracted party is responsible for damages to the other.
How indemnity works
After you sign a contract that enters you into a business relationship with another party, it is possible your contracted client may commit actions that cause you loss or could legally obligate you to pay damages. To prevent this from happening, your contract should have an indemnity clause.
An indemnity provision acts as an assignment of responsibility. If you are an indemnitee, the contract absolves you of liability to compensate the other party. If you are the indemnitor, the contract designates your responsibility to pay for damages or losses.
How indemnification works
People often use the term indemnification synonymously with indemnity. However, this term can also refer to the act of compensating a person or organization once a loss or damage has happened. If indemnity is a promise to assign liability, then indemnification is the act of compensation itself.
Contracts often define what qualifies for indemnification, so it is important to check for specific actions that the contract will allow indemnification for. An indemnity clause may describe exceptions that cannot receive indemnification. Additionally, negligent actions by one party that result in losses may not be eligible for compensation.
While indemnity clauses can guard against litigation risks, the contract language will often limit how far indemnity will go. Carefully reviewing the terms of the agreement may help you make a solid case for your indemnity if a dispute should occur.