If you haven’t ever spent much time around legal jargon, words like “indemnification” can sound quite foreign. Indemnification? As in, “to indemnify?” Huh?
And even more confusingly, you’ll sometimes here the term “indemnification” used interchangeably with the term “release of liability.” They’re similar, but definitely not the same. So it’s important to understand the difference – so you know when a contract says you’ll “indemnify” someone, you’ll know exactly what you’re promising to do.
So cut to the chase, right? What does all this Legalese mean?
Simply put, indemnification is an agreement between two parties (people, or companies) to compensate one of the parties when another person (a third party) sues them and they have to spend money. It is an agreement to be held liable in a specific situation, usually when someone gets sued over something job-related.
So, let’s say you have an agreement to indeminify Mr. X. If Mr. X gets sued by someone else, and you have indemnified him, you have promised to pay for his legal defense. That’s what indemnification is, in a nutshell: agreeing to pay for someone else’s potential legal problems, as long as they’re within reason.
In the case of an LLC, the company usually indemnifies members, managers or officers when they join the company. This way, the individuals can join knowing that, if they are ever sued over something they do in their company roles, their costs will be covered by the LLC, usually as long as they act in good faith. “Good faith” means you can’t just go around trying to get sued. Use common sense. But if a member of the LLC gets sued just for doing their job, indemnification promises that they don’t have to worry about shelling out the money for a lawyer.
Releasing liability is similar to indemnification (in that outlines what happens when something bad happens). But it’s different in key respects. As “liability” means to take responsibility for some action, releasing liability means not taking responsibility for some action. In a nutshell: a person who has released liability has promised not to sue if a specific bad thing happens.
For example, let’s say you decide to go skydiving. The skydiving company will usually have you sign a waiver or release form. This is because they know they are potentially liable, or responsible, for things that could go wrong. By signing the form you are releasing them from liability. You are telling them, “I won’t sue you, and can’t sue you, if things go wrong.”
A limited liability company and its members or managers usually sign a mutual release when the person is leaving the company. In it, they agree to release one another from liability for any claims that they might have against each other. It would not make sense to release liability before the individual leaves the LLC since then there would be no reason for anyone to comply with the Operating Agreement or Articles of Organization.
Both of these terms are commonly used in agreements. And whil they’re nominally related, it’s very important to know the distinction. So when you’re making agreements of your own with DocRun, you’ll know exactly what’s best for you. And you won’t let the Legalese throw you for a loop!
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