Putting a Limit on Your Obligation to Indemnify

I promised to indemnify you. Here’s a quarter.

You might skip over indemnification provisions when negotiating a contract. You understand what they are. They’re just boilerplate, right? Wrong.

First, boilerplate isn’t “extra stuff.” It’s the opposite. Like the strong metal plate around a boiler designed to contain it and prevent an explosion, boilerplate in an agreement is there to protect the agreement, to help make sure that the deal you think you have is indeed the enforceable deal.

Indemnification provisions are one of the types of risk-shifting provisions generally found in important agreements. For example, in exclusive contracts between medical groups and facilities. Or, even in provider agreements between a medical group and its physicians.

Indemnification provisions can take many forms. Some sophisticated agreements often contain multiple indemnification provisions, each dealing with a different sort of situation.

At its essence, an indemnification provision requires one party, the “indemnitor,” to hold the other party, the “indemnitee,” harmless (i.e., to pay for any damages caused and, perhaps, to defend it and/or to pay its attorneys’ fees) in the event of the indemnitor’s breach of whatever obligation or set of facts is the subject of the provision.

But there’s another, related issue that many parties don’t think to negotiate: What’s the limit of indemnification? Without a specified limit, well, there is no limit.

Although the notion of insurance is similar to indemnification, it is different, certainly in respect of the fact that the insurer isn’t “indemnifying” as to its own acts. Yet, insurance policies have limits to the carrier’s liability. For example, a medical malpractice insurance policy might have a per claim limit of $1 million and an aggregate annual limit of $3 million.

When you’re next negotiating an indemnification provision, at least think about whether you should, and whether you can, think more like an insurer and cap the limits of your liability.

Depending on the type of agreement, the type of indemnification provision, the parties, their relative positions, and whether the indemnification is one-way or mutual, it may or may not be in your interests to pursue a cap.

Just don’t let your decision be made by default, that is, by not thinking about it.

Comment or contact me if you’d like to discuss this post.

Mark F. Weiss

Continue Reading...


Why You Must Understand Personal Incentives in Entity Negotiation

It was late December. I was sitting across the table from the hospital CEO. We were in the midst of negotiating a deal involving my client, a large physician group, and his facility.

And then, he made a major negotiating blunder, giving up on a deal point clearly in my client’s favor, in fact, a better result than we had projected.

Was he tired? Was he sick? Was he lazy? Probably none of the above. In fact, it probably wasn’t even a blunder.

More than likely, the terms of his compensation plan incentivized him to get the deal done before the end of the year. It’s like the pressure on a car salesperson to sell another car on the last day of the month. Just on steroids.

When you negotiate with an entity on the other side of a deal, you obviously have to take into account what the entity’s motivations, interests, and payoffs might be. Everyone knows this.

But what’s commonly missed is an appreciation for the fact that an entity is always going to be represented in the negotiation by an individual or individuals.

Ask yourself what is that person’s individual motivation in the negotiation? How does he or she get paid? How does he or she get evaluated? How does he or she get rewarded?

While you should, of course, research and evaluate what the business entity on the other side of the negotiation seeks in terms of success in a deal, it pays just as much to understand what success means for its representatives and executives.

It might be entirely possible to deliver a complete win to the individual sitting across the table from you while delivering a complete win to your own organization in regard to the terms of the deal.

I’m not a big believer in win-win in negotiation. But this isn’t win-win to the extent that sometimes the motivated executive is willing to cave on positions to his side’s detriment in order to advance his or her own personal position.

Sure, it sounds screwy. But it’s no more messed up than public company executives who play the quarterly earnings game.

You’re doing them a favor by taking advantage of it.

Comment or contact me if you’d like to discuss this post.

Mark F. Weiss

Continue Reading...