How to Understand Your Clients’ Indemnification Agreements

Every deal needs to create value for both the client and your company. There is no reason to trade value without capturing an appropriate portion of the value you create. You need the investment to allow you to invest the time and resources in helping your client with the better results they need and to provide you the profit your company needs to succeed long term. Your client needs the investment to be fair to them, and you need it to be appropriate for your company.

There is another area where there needs to be an agreement that is fair to both sides; salespeople and sales managers sometimes know too little about this area to understand the issues. That area is indemnification, and it can be a critical sticking point.

What Does Indemnification Mean

When you are required to indemnify your client, it generally means that you are liable for any damages that your company or one of your employees causes that results in a third party making a claim against your client. On its face, that seems fair enough; if your company’s actions are responsible for someone suing your client, it seems reasonable your client believes your company should pay for whatever your did.

You might believe it is fair, but merely reverse the language and ask your client to agree to reciprocal indemnification, where they indemnify you should you be sued for something they did. You’ll see just how fair your client believes it is when they are insuring you.

Maybe your agreement already requires your client to indemnify you. If it does, then you know how it complicates things (and necessarily so).

Risk Shifting

Now, there is a massive push for companies to shift as much risk as possible to their suppliers. They want to avoid liability, including their own, as much as possible, often with no regard for any fundamental fairness. Every business has to deal with the risks inherent in their business, but some companies want your company to be liable for things that should be their responsibility.

As a professional salesperson, you don’t need to know the ins and outs of the laws around insurance and liabilities, something we can leave to our brothers and sisters who sell insurance. You should, however, know enough about contracts to recognize when the indemnity is a problem.

The Problems of Indemnification

Upside Down Deal: It can be challenging to agree to indemnify a client when it means you have an unlimited downside risk that is greater than any profit your company might make in the entire lifetime of your agreement. Your company is going to balance the client’s value against the risk you are willing to take to determine what is possible and what isn’t. Being a mature salesperson means recognizing a lousy deal and walking away or pushing to have your contacts help you negotiate something fair.

No Exceptions: You are likely to see agreements that require complete and total indemnification from any claim—including claims that your client might have caused. Some deals include the client’s negligence or willful misconduct, something your legal team is going to redline. Your company is not going to willingly accept the responsibility to pay for claims your client caused. Without limits to what triggers indemnification, you are going want to help your team get restrictions added to your client’s agreement.

Not Reciprocal: Mature companies who want a partner include language in their agreements that provide for reciprocal indemnity. If your actions get me sued, you indemnify me; if my actions get you sued, I’ll guarantee you. Reciprocity is what professionals prefer. It’s clean, easy, and fair.

Your legal team is going to have an easier time agreeing to something reasonable.

Choice of Counsel: The “choice of counsel” is inside baseball stuff. Almost no one you know is aware of the fact that your insurance company is not going to defend your client in a lawsuit once they choose their counsel. The language that states that your company is liable for whatever high-powered, most expensive-attorney-we-could-find may cost you more than any settlement you might make with an aggrieved party.

There is a high likelihood that your client’s team doesn’t know that your company has to pay that bill, not your insurance company. One of the things that make you a consultative salesperson is knowing something your client doesn’t know.

Includes Their Liabilities: My experience is in staffing. I would have clients who want me to defend them from claims employees made against them, including the acts and omissions of their employees and supervisors. You don’t want your company to be liable for something your client does—or doesn’t—do. When you see something that looks like it is unfair, it probably is.

For Want of a Deal

You might want a particular deal that requires you to use your client’s paper instead of yours. You might even need that deal so bad that it hurts you even to imagine having to negotiate something as complicated as indemnification.

There is no reason to walk away from these types of agreements without working to negotiate something reasonable. Many clients know their legal team added aggressive terms and expects to negotiate with their suppliers and their partners. Hand it off to your legal team and let them take a run at settling something.

When all else fails, do right by your company and walk away from a bad deal.

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