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Indemnification: What it means and why it's important

 

March 12, 2013

The concept of indemnification is likely in any well drafted contract you may or have executed. And, it is likely to be one of the first provisions you have glossed over.  Reason being, you may not understand the language in the actual provision and you may not understand the impact or importance of the language contained therein. Simply put, and straight from TheFreeDictionary.com, to Indemnify is "[t]o compensate for loss or damage; to provide security for financial reimbursement to an individual in case of a specified loss incurred by the person."  What this actually means is, by contract, parties may determine who shall bear the risk and expense (including attorneys' fees!!) should a certain circumstance arise.  A key example is malpractice.  In exchange for the premiums you or your employer pays on your behalf, your malpractice carrier agrees to indemnify you against certain claims.  This arrangement is by contract.  Should a claim arise that is outside the contracted scope of coverage, the insurer will disclaim coverage and attempt to force you to stand on your own against that claim.  Should the liability be in excess of the coverage limit, again, you will be on your own. 

An area where indemnification is becoming more and more important, and is relevant to all practitioners, is in their service agreements - whether that document be an employment agreement, independent contractor agreement, consulting services agreement or other professional services agreement.  Particularly, preventing against exposure of audit.  If you are the employer, you will likely want to require that your employee will indemnify you and the practice should an audit arise based on poor documentation or non-medically necessary care.  Or, in the alternative, if you are the employee, you may wish to have the employer indemnify you should an audit arise as a result of improper billing practices, which you will likely have no control over.  In either circumstance, where indemnification is provided for, only the party at fault would bear the expense (so long as the provision was drafted properly).  Another services agreement indemnity issue I have seen is where the employed physician is requested to take on responsibility greater than typical "employee" status, for instance, the doctor in charge of a site of a larger organization.  In such a circumstance, where the employee does not have the authority of an owner, asking the employee to agree to a broad indemnification may open the employee to extreme potential liability. 

A key element of indemnification is not just who will be responsible and have to pay - also, when will that responsibility kick in and when will that person have to start paying?  Is the party potentially responsible allowed to take on the defense?  Or must the indemnifying party, if it were an employee, lets say, wait for the employer to defend and then have to reimburse?  If you are going to be held responsible for a sum of money, you may want to have a say in the course of the resolution (or lack thereof!). 

With most contractual provisions, with indemnification the devil is in the details.  And like all other contractual provisions, don't sign until you understand the terms and agree to them!


Have a contract question?  Contact Jennifer at Jennifer@Kirschenbaumesq.com or (516) 747-6700 x. 302.


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