An indemnification provision serves as a contractual remedy to redress a party’s (or third party’s) financial loss suffered as a result of a claim, breach, or some other event or condition set forth in the provision. Indemnification serves as a risk allocation mechanism derived originally from insurance law. Each term—“indemnify,” “defend,” and “hold harmless”—has a distinct and important role in an indemnity clause, so it is important to understand the nuances and differences among the three terms.
Defend
To “defend” requires the indemnifying party to engage attorneys and manage litigation or other proceedings when a claim that is covered by the indemnification provision is brought against the indemnitee. This obligation includes defending, financing a defense, or reimbursing an indemnitee for defending a claim. The duty to defend arises as soon as a claim is asserted against an indemnitee.
Some jurisdictions, including California, have found that this duty to defend does not first require a finding of indemnitor liability if the duty to defend is expressly stated in the contract. In Crawford v. Weather Shield Manufacturing, Inc., the Supreme Court of California held that “defend” is distinct from “indemnify,” and that the duty to defend arises at the onset of a claim, before a finding of negligence. Crawford, 44 Cal. 4th 541, 559 (2008).
Indemnify
To “indemnify” means to pay or compensate the other party for its legal liabilities or losses. An indemnitor can indemnify for damages, which typically do not arise until the end of a case or resolution, or they can indemnify for liabilities, which are broader and require the indemnitor to pay as soon as the indemnitee becomes liable. Some states, including California, have an implied duty to defend as part of an indemnity obligation, unless it is expressly negated.
Further, courts are divided on whether indemnification covers negligence. The majority of jurisdictions believe indemnity is construed to exclude negligence unless expressly stated in plain, clear, and unequivocal terms. The minority of states, including California, believe that “active” negligence must be expressly stated to be covered, whereas “passive” negligence is generally assumed to be covered. Crawford, 44 Cal. 4th at 562.
Hold Harmless
“Hold harmless” is the promise to pay any costs that may result from a claim covered by the indemnity provision, including any subsequent fallout stemming from the covered claim and/or its settlement.
Courts differ in interpreting “hold harmless.” The majority of courts believe “hold harmless” and “indemnity” are duplicative. California, however, is one of the minority states that views the two terms as having distinct purposes. Where “indemnity” is an offensive right to seek indemnification, “hold harmless” is a defensive right not to be bothered by the other party seeking indemnification. This difference is best illustrated in Queen Villas Homeowners Ass’n v. TCB Property Management, whereby the court states that hold harmless can add to indemnity terms by releasing the indemnitee from payment obligations due to the indemnitor for the indemnitee’s own actions. Queen Villas, 149 Cal. App. 4th 1 (2007).
The above highlights how it is important to give careful thought and consideration to each word—indemnify, defend, and hold harmless—when addressing indemnification provisions.