Does an Indemnification Clause really protect you?

Over the weekend, I heard about a case that made me think  about indemnification provisions and their value. A
television program bought a leaked video-clip of a very famous actor disparaging another entertainer. Trouble is, the guy who sold the clip to the TV producer didn't actually own the footage in question. Sure, he swore up and down (at first) that he owned it, and promised to indemnify the show. So they're protected, right?

Not so fast!

Nearly every entertainment industry contract includes an indemnification clause, and for many players in the business, it's an integral, and non-negotiable provision. But these “hold-harmless” provisions may not really provide the protections and security they would seem to. In this short article, I'll explain why having an indemnification clause in your contract may have little impact on your situation should you find yourself in litigation of third-party claims. Even if those claims arise as a direct result of the other party's mistakes or wrongdoing.

What is an indemnification clause?

Indemnification is the part of an agreement that provides for one party to bear the monetary costs, either directly or by reimbursement, for losses incurred by a second party.

In many entertainment contracts, the indemnification clause reads something like:

INDEMNIFICATION: [Party A] hereby agrees to indemnify, defend and hold [Party B], its parent, affiliates, subsidiaries, agents, representatives and associates, and the officers, directors and employees of each of them harmless from and against all losses, costs, damages, judgments, liabilities and expenses (including, without limitation, attorneys' fees and any payments that may be due any third-party arising from any claim whatsoever and whenever brought, which may be brought based directly or indirectly upon Party B's use of the material, or any breach of Party A's warranties and representations made herein.

How Indemnification Clauses Work.

While the above indemnification clause is fairly simple and straightforward (believe it or not), these provisions can become quite complex, and can provide for mechanisms whereby upon learning of any potential claim, a party must notify the other, and the indemnitor (the party giving the indemnification) must then take steps to provide a defense, hire lawyers, and settle the case. In other deals, the indemnitee (the party receiving the indemnification) will control things.

How Indemnification Clauses Might NOT Work

Among the first questions to ask about any indemnification clause is “How?” How will the indemnitor actually provide a defense? How will the indemnitor come up with the resources needed to resolve the case? Will the indemnitor have insurance? Assets sufficient to cover any potential liability?

Imagine this (very common) scenario: Producer purchases a spec-screenplay from an unknown writer. Writer agrees to indemnify and hold the producer harmless against any claims. So, producer goes forward to produce a $50 Million film based on this screenplay.

Sure enough, the screenplay turns out to be based on an unpublished book written by the screenwriter's cousin, and which the screenwriter read, but didn't mention to the Producer. Of course, there was no underlying rights deal… So when the film hits the theatre, the cousin sues the producer and wins.

With lawyers fees, court costs, and the judgment, the Producer might now be on the hook for a million dollars or more. So, the Producer seeks indemnity from the screenwriter.

Do you think he can pay? If not, maybe he declares bankruptcy, and the Producer is left holding the bag. Perhaps the producer even winds up going bankrupt him or herself.

In this scenario, the indemnification clause is basically worthless because it's not backed with any real resources. It's just an empty promise. Even if the screenwriter owns a house, and a fat bank account, collecting on the indemnity could require a second lawsuit, this time between Producer and Screenwriter.

Solutions

Should you still include indemnification provisions in your contracts? Yes. Absolutely. Such clauses most certainly do provide a degree of protection against liability caused by someone else. But it's short-sighted to view the indemnification language in your deals as sacrosanct, and non-negotiable. the clause is of little value if it can't be relied upon to actually make you whole if there's a problem.

Fortunately, there are some solutions.

First, negotiate the terms of the indemnification clause carefully, with an eye on the big-picture. Consider whether you actually want the other party hiring and paying your lawyer, and managing any litigation that might arise, or whether you'd rather do that yourself. Consider whether the indemnitor will actually have the ability and resources to do so, or to reimburse your expenses. If there's a chance the answer is “no”, be sure to include a backup mechanism. Require a certificate of insurance. Require a guarantee from a person or company that has the necessary resources. Require that you be named as an additional insured on any of the indemnitor's insurance policies. Require some kind of security.

Second, carry your own insurance. This way, if there's a problem, your insurance will cover your expenses, and losses… and then they'll be responsible for enforcing the indemnity provision, and collecting from the indemnitor. This process is called “subrogation”, where your claims essentially become your insurance company's, and leaves you quite well protected. Just be sure to read and understand the terms of your own insurance policies.

Carrying your own insurance is also wise, since most well-crafted contracts will include indemnification provisions that are reciprocal, with each party indemnifying the other. So, your insurance will back you YOUR promise to indemnify the other party.

Conclusion

Obviously, indemnification clauses are but a single provision in the larger fabric of most entertainment contracts, but they're sufficiently complex and misunderstood by laypersons, that they warrant the engagement of an experienced entertainment lawyer.