Does an Indemnification Clause Really Protect Your Brand’s Reputation?

Industry Information | April 20, 2020

When asked about risk mitigation, too many times companies fall back on the common belief: “We are covered with our contractual Indemnification Clause.”

However, even in the legal and business communities, there is a discussion about how much the indemnification clause actually protects the holders.

An indemnity clause is a contractual transfer of risk between two parties to prevent loss or compensate for a loss, which may occur as a result of a specified event such as a contractor error.

The problem with this is twofold; the first is based solely on a financial remedy, and the second is the assumption the other party can correct the error and pay the costs as required in the indemnification clause.

In today’s digital world, reputations and brands can be shattered within weeks, even hours. When individuals, especially contracted individuals, are in the picture, the risks are even higher because they are unknown individuals who may not share the company’s culture and the same concern for the brand or customers as a direct-hire employee How is reputational risk addressed in the indemnification clause? In most cases, it is not and cannot be addressed.

What if a contracted person, through their actions, creates a reputational or brand loss? In the contracting industry or the ride-sharing industry, we see this happen all the time with headlines stating “XYZ Ride Sharing sued after driver charged with sex assault.”

What amount of financial settlement can ever be reached to correct the negative impact to XYZ’s reputation and brand?

To mitigate this risk, companies need to focus on prevention before an incident, rather than reacting after a loss, such as identifying potential contractor risks before they repeat themselves.

When employees are hired, employers spend a lot of time on due diligence, including criminal background checks and driving checks to reduce risks caused by the employee.

Are we applying the same due diligence when using contractors or contracted individuals to represent our brands when delivering our services? A lot of risks are preventable, including reputational risks. Look at how you can prevent risks associated with your contracted individuals or networks and put steps in place to reduce these risks which are not coverable under an indemnification clause.

It is almost impossible to estimate a financial value on a negative impact on your firm’s reputation and even harder to extract that payment from the other party even with an indemnification clause. Preventative steps not only reduce the financial impact an indemnification clause cannot cover but also proactively protects a company’s brand and reputation.

Contents are provided for information purposes only and should not be construed as legal advice. Users are reminded to seek legal counsel with respect to their obligations and use of PlusOne Solutions services.

ABOUT PLUSONE SOLUTIONS:
For more than 15 years, PlusOne Solutions has been an industry leader in the risk management field by specializing in compliance programs that meet the complex challenges of geographically dispersed contractors, vendors, and employee networks. PlusOne Solutions protects companies from possible financial, legal, and reputational risks associated with contractor and vendor relationships while creating safer work environments for everyone and is an Accredited Background Screening Agency by the Professional Background Screening Association.