What is Indemnification?
The Short Answer
Indemnification explained simply
Indemnification is a legal agreement where one party (the indemnitor) promises to protect another party (the indemnitee) from financial loss or legal liability. This protection usually covers specific events or circumstances outlined in a contract. For example, in a business sale, the seller might indemnify the buyer against losses from undisclosed liabilities that existed before the sale. It’s a way to allocate risk between parties.
Real-World Example
The Software Company Sale
Imagine a software company is sold. The buyer discovers a lawsuit filed against the company for a software bug that existed before the sale. If the seller indemnified the buyer against pre-existing legal issues, the seller would be responsible for covering the costs of that lawsuit, not the buyer. This protects the buyer from unexpected financial hits related to the past actions of the business.
Why this matters
Indemnification is important because it protects you from unexpected financial burdens after a deal closes. It clearly defines who is responsible for what risks, giving both parties peace of mind. Without it, you could be on the hook for problems that weren’t your fault.
Always make sure indemnification clauses are clear and specific. Vague language can lead to disputes later on. Know exactly what you are agreeing to cover, or what you are being protected from.
Always make sure indemnification clauses are clear and specific. Vague language can lead to disputes later on. Know exactly what you are agreeing to cover, or what you are being protected from.
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