It is the standard of our industry for your contracts with your customers to contain both a Limitation of Liability Provision and an Indemnification Provision. I am often asked, “What is the difference?” Here is your answer.
A Limitation of Liability Provision limits or caps the damages (money) which can be recovered against your company by your customer if you make a mistake.
An Indemnification Provision requires your customer to defend you (and pay your attorneys’ fees and any settlement or judgment) against any lawsuit brought against your company by a third party (that is, someone with whom you did not contract to provide any services).
Here is an example which will illustrate the difference between the two essential provisions. Suppose you contract with the owner of a commercial building to perform inspection services for a fire sprinkler system in the building which has fifty business suites. There is a fire in the common area, and the fire sprinkler system did not operate (which can be traced to a mistake you made during a recent inspection). The building burns down. There is $15 million in property damage to the building. Several of the business tenants of the building (with whom you had no contract) suffer property and business interruption losses. Everyone files a lawsuit against your company—the building owner and the business tenants. Here is how the Limitation of Liability and Indemnification Provisions work together:
The Limitation of Liability Provision puts a cap on the damages which the owner of the building (or the owner’s insurance company) can recover against your company for the $15 million in property damage.
The Indemnification Provision requires the owner of the building to defend you (and pay for your attorneys’ fees and any settlement or judgment) against the lawsuits filed by the business tenants of the building with whom you had no contract.
Both provisions are essential to protect your company against the potential for crippling liability. That is why any well-drafted industry contract includes both provisions.
Michael J. Revness, Esq., is a founding partner and chairs the security alarm department at Kurtz & Revness, P.C. For questions, comments, or requests for legal service, please call Mr. Revness at (610) 688-2855, or drop an e-mail to firstname.lastname@example.org. This article is for information purposes only and does not constitute, and should not be relied upon as, legal advice.