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Indemnity agreements are commonly combined with
to negotiate this point, but it should understand, going
three other types of agreements. A defense agreement
into the relationship, that it accepts a substantial risk.
requires the Indemnitor to pay any litigation expenses the
The insurance requirement can also play havoc with the
Indemnitee might incur if sued. An insurance agreement

parties’ intentions. The Indemnitor must confirm with its
requires the Indemnitor to obtain insurance covering the
broker or insurer that the existing policy will cover the
Indemnitee if a loss occurs. A hold harmless agreement
contract and confirm that the Indemnitee is added as an

states that the Indemnitor will not be liable to the Indem-
nitee for any losses arising out of the contract. Thus, all
demnitee should also discuss the coverage limits with its
together, a fairly straightforward “bare bones” provision
broker to ensure enough to cover any potential loss. If the
might read something like this: additional insured, steps sometimes overlooked. The In-
component that is the subject of this contract. EDM Today Magazine
EDM Today Magazine The Indemnitee could also face an unexpected wrinkle
Indemnitor neglects these insurance requirements, it will
EDM Today Magazine
nevertheless be on the hook for the Indemnitee’s loss, but
Component Supplier agrees to indemnify, defend, and
it may not be insured. This situation could be ruinous.
hold OEM harmless from and against all liabilities, losses,

suits, claims, judgments, fines, or demands of any kind
arising from, related to, or caused by the component that
with respect to insurance requirements. Say the compo-
is the subject of this contract. Component Supplier agrees
nents are damaged in transit, resulting in a loss of $1.5
to provide and maintain, at its own expense, a policy of
million to the OEM. As an additional insured, the OEM
liability insurance and to name OEM as an additional
turns to the insurance policy and is paid the policy limits
insured on a primary, non-contributory basis for any
of $1 million. The OEM then looks to the Component
liability arising from, related to, or caused by the
Supplier, who improperly packed the components, for the
additional $500,000. Some states will view the insurance
In practice, if the component fails and the OEM is sued, agreement as an agreement to look solely to insurance,
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the OEM would tell the Component Supplier that the
not each other, for any loss. In those states, the OEM
would be out of luck.
Component Supplier must pay to defend the suit and pay
any judgment or settlement. The Component Supplier
The point here is that indemnity agreements are too
would then turn to its insurer, and, assuming adequate
important, and their potential effects too complex, to
coverage, the insurer would foot the bill for everything.
simply cut and paste language from prior contracts into
Thus, the Component Supplier and OEM can largely
a new contract. Many potential pitfalls can be addressed
uninterruptedly focus on running their business while the
with skilled drafting, and it is well worth it to spend the
insurer focuses on the lawsuit.
Of course, things are rarely this simple. One potential
the expense of fighting it out after a loss. The parties

complication is that the true cause of a product failure
should consider what they are agreeing to and how the
is often in dispute. While the OEM might argue that the time on getting it right at the beginning compared to
contractual language might play out in different scenar-
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ios, and ensure that any indemnity agreement fits the
component failed, the Component Supplier might argue
that the OEM improperly integrated the component. The
contract as a whole and sets expectations with as much
resulting court fight will undermine the indemnity agree-

certainty as possible.
ment’s intention to protect the OEM from litigation.
EDM Today thanks Mr. McGrory for his insight.
In an effort to avoid this result, the Indemnitee might also
For further information on this topic or to clarify issues,
include language in the agreement that the Indemnitor
Mr. McGrory can be contacted directly at 312.455.3902
or MMcGrory@amundsendavislaw.com.
must handle all losses, even those caused by the Indem-
nitee’s negligence. In other words, using the example
above, the Component Supplier must defend and indem-
Betsy@EDMTodayMagazine.com to reach the author
nify the OEM even if the loss was the OEM’s fault. Courts
or for questions you would like to be addressed in
will generally uphold these agreements, though they will As always, you can reach Legal News and Views at
future articles.
not require indemnity for an Indemnitee’s gross negli-
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gence, willful and wanton conduct, or intentional acts.
It is an onerous provision, yet very common, especially
when the Indemnitee has superior bargaining power and
can dictate terms. The Indemnitor may have little ability
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