What is the difference between an indemnification provision and an insurance provision in a commercial contract?

February 4, 2020

 

 Often confused, indemnity clauses and insurance clauses in commercial contracts serve different but overlapping purposes.

 

An indemnification clause in a contract serves to shift the risk of liability from one party to another.  Ingargiola v. Waheguru Mgmt., 5 A.D.3d 732, 774 N.Y.S.2d 557 (2d Dep’t 2004).  The party granting the indemnity promises to hold the beneficiary party ‘harmless’ from the proscribed risks and to ‘defend’ that beneficiary party.

 

Here is the language of a sample indemnification clause:

 

EACH BORROWER SHALL INDEMNIFY AND HOLD HARMLESS THE INDEMNITEES AGAINST ANY CLAIMS THAT MAY BE INCURRED BY OR ASSERTED AGAINST ANY INDEMNITEE, INCLUDING CLAIMS ASSERTED BY ANY OBLIGOR OR OTHER PERSON OR ARISING FROM THE NEGLIGENCE OF AN INDEMNITEE.

 

Note that, generally, indemnification clauses do not refer to any monetary amounts.  They are a blanket assumption of risk by the granting party to the beneficiary party.

 

In contrast, an insurance clause in a contract imposes a requirement on one party to obtain particular amounts of insurance coverage for the benefit of the other party.

 

Here is the language of a sample insurance clause:

 

Supplier will maintain Commercial General Liability insurance of not less than $2,000,000 Combined Single Limit for Bodily Injury and Property Damage. Supplier’s general liability insurance must include coverage for broad form property damage, blanket contractual liability, advertising and personal injury liability, and products/completed operations. Supplier will also maintain Automobile Liability insurance with a combined single limit for Bodily Injury and Property Damage of not less than $1,000,000 per occurrence.

 

The two clauses – indemnity clause and insurance clause – overlap in that an insurance clause ensures that a fund of money, i.e., the applicable insurance policy, is available to cover the risk of loss that has been assumed in the indemnity clause. 

 

Because the two clauses overlap, it is essential to ensure that commercial contracts contain both an indemnity clause and an insurance clause.

 

For more information about this article or other issues, please contact us, The Bachman Law Firm PLLC at judith@thebachmanlawfirm.com or 845-639-3210.

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