Understanding Indemnification for Small Business Owners

Small business owners, like you, understand the importance of a contract in how it lays the ground rules for a relationship. But who actually knows what everything means in one? With contracts consisting of dense language, it’s easy to overlook a word or sentence because you just want to get through it. But it can be the smallest of things that can put your small business at risk of great liability. For instance, there’s one crucial aspect in contracts that is typically unknown to many – indemnification. This simple word is often ignored or overlooked by those who don’t know what it is or those who think they know what it is. This can be a costly misconception.

Indemnity is a protection element in a contract in which liability is transferred from one party to another in the occurrence of a damage (1).

A business who prefers to avoid the risk of potential damages or losses to others must always consider an indemnification provision, or indemnity clause, in its contract. These additions to a contract can mitigate the chances of a business having to pay some hefty dollars when a lawsuit is filed.

Indemnification for small business is a complex subject.

As one of the most commonly negotiated provisions, many factors go into creating a suitable indemnification clause. This includes determining an ethical level of indemnification which can only be determined after evaluating the risk associated with a business, determining time and financial limits, and more. Many believe indemnification can be used interchangeably with liability, and think they’re safe. But that’s where trouble can start. Each of these terms require their own clause.  Indemnity addresses which party must compensate for a legal claim, whereas liability addresses the amount of liability a party can receive. All bases must be covered to be fully protected.

There are vast consequences to improper use of indemnity.

If an indemnity provision is not in place, is misused, or is overly broad, your business can be at fault for damages that are completely out of your control. Plus, a brand’s image and credibility can be in jeopardy as it’s hard for people in a local setting to see past a lawsuit that a small business is facing. 

As an example, say you own a go-kart business. Assume customers signed a waiver before driving and it did not include an indemnification provision. Then on the track, driver 1 crashes into and gives whiplash to driver 2. The first thing driver 2 will most likely do is directly blame your business and seek compensation. While you can try to argue that the harm was not inflicted by your business, you may still be liable for damages because you have inadequate protection.

For another example in the same scenario, say you included a professionally-written indemnity provision with an accurate description. Driver 2 may still hold you at blame. But the provision you established protects your business as it transfers indemnification from you to the negligent driver 1. 

*Note that indemnification is the true act of one compensating for damages, whereas indemnity is the protection from having to compensate (2).

We are here to help.

Each word in an indemnity provision matters and must be crafted in a tedious way to reap the full security benefits of establishing one. But for you, as a small business owner, we know the value of time and the large variety of tasks you have to manage each day. So you shouldn’t have to also worry about the complexity of a contract, the knit-picking of every detail to it, and hoping you’re protected. As a small business ourselves, Lonzo Law understands that having time and confidence that you are protected are critical, and that’s why we are here to assist you. Experienced in this field, we are exceptional at taking your specific model and curating the right counsel to support you throughout your journey. We are here to take the legal stress off our clients’ plates and make sure that their business is as bulletproof as possible, allowing them to purely focus on fulfilling their business’ mission. It’s never known when a mishap can occur, so it is vital to act early to ensure you don’t find yourself being liable for someone else’s behavior.

For more information about Lonzo Law and how we can serve you, contact us.