What Is Indemnity and Why Is It Important?

Indemnity agreements, also known as indemnity clauses, play an integral role in contracts. That's because they are designed to punish the nonperforming party and reassure the damaged one they will be reimbursed for losses caused by the errant entity. Indemnity clauses are included in contracts as a way of discouraging parties from breaching the underlying contractual agreement.

What is indemnity?

Indemnification is protection against loss or damage. When a contract is breached, the parties look to its indemnity clause to determine the compensation due to the aggrieved party by the nonperformer. The point is to restore the damaged party to where they would have been if not for the nonperformance.

Another type of indemnity is loan indemnity. In the B2B world, loan indemnity is a valuable protection against the sudden inability to repay a mortgage or loan. For example, if a borrower suffers a disabling event that impairs their ability to pay their secured debt, like a mortgage, their loan indemnification clause kicks in to pay the debt.

In legal terms, indemnity requires a nondelivering entity to compensate the aggrieved party for losses it incurred or expects to as a result of the nonperformance. An indemnity clause can also act an as exemption from liability from damages, so the wording of the agreement is extremely important.

Indemnity and contracts

There are numerous contractual scenarios that could benefit from having an indemnity clause as part of the agreement. They include:

• Commercial contracts
• Supply agreements
• Loans
• Leases
• Licensing agreements

Promissory notes can also include an indemnity agreement, triggered by the loss, theft, destruction, or damage to the note. Adding an indemnity agreement to a promissory note requires the borrower to execute and deliver a replacement promissory note if the original note is lost, destroyed, stolen, or damaged. Such an agreement protects the noteholder's ability to enforce the loan.

An indemnity agreement also alleviates the borrower of all financial liability for executing a new promissory note to replace the one that was lost or damaged. It assures the borrower that no one will try to enforce both the original note and the new note and that the borrower will not have to pay anything in connection with the creation and execution of the new note.

If you already have a signed promissory note that has been lost or damaged, you can prepare a separate affidavit of lost promissory note and indemnity agreement that contains a promissory note indemnity agreement. An affidavit is a written statement that is made under oath and is therefore legally binding on the party that signs it.

Promissory notes with hold harmless indemnity agreement

To anticipate the possibility of a promissory note becoming lost or damaged, it is a good idea to include an indemnity agreement in the note itself. Such a provision also requires the borrower to execute a replacement note if the original is lost or damaged.

If a promissory note does get lost or damaged, it will be necessary for the noteholder to execute an affidavit of lost promissory note and indemnity agreement.

The affidavit will be a statement setting forth the terms of the original note and the details of how it was lost or damaged and including the type of indemnity agreement mentioned above. It must be signed in the presence of a notary public.

You don't need to be concerned about how to write an affidavit, as the affidavit of lost promissory note and indemnity agreement can be completed with the assistance of an attorney.