The world of intellectual property (IP) is filled to the brim with complexity. Without proper time, attention, and scrutiny, businesses and the executives that lead them can open themselves up to litigation if they aren’t careful with their treatment of an IP. To safeguard yourself, you need proper legal advice complete with appropriate contract verbiage. Our focus today is indemnity, and the importance of indemnity clauses in particular.
What is indemnity?
If you’ve been in business for any length of time, chances are you’ve heard the term “indemnity.” You may even have a working definition, or at least a close approximation, that you use in your day-to-day duties, but what does the term actually refer to?
You often hear indemnity in both:
- The insurance industry
- Contract law, specifically tech/ IT
Indemnity means that one party agrees to cover cost and liability for another party should a third party file suit against them. To fully understand the concept, let’s examine a hypothetical situation.
How does IP indemnity work?
With classic insurance, indemnity is easy to understand. Your business pays the insurance company a premium to cover some aspects of their business. When things go wrong, as they can and often do, the insurance company pays out for the damages, at least in accordance with the terms of the insurance policy. But what about contract law? How does indemnity apply in a legal setting?
When all’s said and done, there are only slight, nuanced differences between insurance and legal indemnity; they share a significant strand of DNA. Let’s take an example from a business setting to illustrate.
Let’s say your company employs a contractor who requires the use of a specific software or app to carry out business. If your contractor uses that software in a way that infringes on the intellectual property of another party, say its creator or owner, they could bring a suit against your contractor. An indemnity clause sets out provisions for defending them against such a suit. Let’s finish our discussion by looking at how that process works.
The importance of the indemnity clause
In business, relationships are built on trust. The contractors that your company chooses to partner with have to feel safe and protected in all their business dealings. Otherwise, little will get accomplished. That doesn’t mean you have to approach indemnity with a carte blanche attitude, though. You want to reasonably assure your partners that damages and legal fees will be covered should IP infringement occur without overextending your firm’s responsibility. It boils down to protection and safety. That’s why the indemnity clause –and indemnity in general– is such an important feature of the modern-day business landscape.