Drafting Indemnification Provisions in Commercial Loan Transactions

A loan term sheet or application doesn't typically include the details of the indemnification provisions, but they are generally required by lenders and can change the allocation of risk between the parties in a commercial lending transaction. While indemnification provisions can be technically challenging, counsel must understand them to appropriately draft the provisions. To the extent that insurance can cover certain risks, counsel should consider the use of insurance to supplement an indemnity provision. It is also useful to understand the differences between covenant, guaranty, and indemnity.

An indemnification clause should include clear identification of the indemnitors and the parties to be indemnified. The indemnification clause should also specify the events and damages covered and the effect of a parties' standard of care. The term of the indemnity (including survival beyond the loan term), thresholds triggering liability, caps on liability, and choice of counsel to defend against any claim are critical points to consider.

Indemnity clauses often include general indemnity of lenders for losses, claims, damages, or expenses arising in connection with the loan and specific indemnities for taxes attributable to loan payments or disposition of loan collateral, violation of covenant, representation or warranty, and expanded indemnity for information provided to a lead lender in connection with a syndication or secondary market transaction are frequently required. In syndicated transactions claims against agents in performing these duties under the syndicated loan agreement might also be the subject of indemnity protection.

Listen as our authoritative panel examines the nuances of indemnity provisions in commercial loans. The panel will also discuss the types of indemnities borrowers (and guarantors) are typically providing in commercial transactions, including syndicated and securitized loans. They will outline the legal differences between covenant, guaranty, and indemnity.

1. The legal effect of indemnity
2. Building blocks of an indemnification clause
   1. Identifying indemnitor(s) and indemnitee(s)
   2. Defining covered damages and events
   3. Standard of care as defense
   4. Triggering events
3. Technical elements
   1. Baskets and caps on the claim
   2. Term and survival periods
   3. Limitation on types of damages: consequential, punitive
   4. Choice of attorneys
4. Typical borrower indemnities
   1. General indemnity of the lender
   2. Taxes attributable to loan payments, disposition of collateral
   3. Losses resulting from representation, warranty, or covenant breach
   4. Indemnity for agent duties under any syndicated loan agreement
   5. Extended indemnity for information provided to the lender in connection with a syndication or secondary market transaction
5. Enforcement Issues
6. Addressing insurance in the indemnity

The panel will review these and other vital questions:

• Why is an indemnity different from covenant and guaranty?
• What are the fundamental components of an indemnification provision?
• What are some considerations in negotiating caps on liability, survival periods, and types of damages?
• What types of specific indemnities are standard for commercial loan transactions?
• What additional indemnities should be considered in syndicated and securitized deals?
• When is insurance an appropriate substitute or supplement for an indemnity?