A knock-for-knock indemnity is a specific type of agreement between parties to a contract to hold each other harmless against claims and other liabilities, such as the death or injuries of workers or property damage.
The clause makes each party responsible for any claims or costs related to deaths or injuries to their own workers as well as property damage to their own property. Each party is solely responsible for its own personnel and property, often without regard to negligence, fault or cause.
What does a knock-for-knock clause typically contain?
These indemnities were originally used in off-shore oil and gas operations involving several contractors but are now used extensively for on-shore projects and in other types of contracts. The key features are:
- They are mutual, meaning each party accepts liability for losses for their own workers and property, and holds the other party harmless
- The scope can extend beyond the main parties to include subcontractors, directors, affiliates, officers and employees
- They stipulate who is covered, what is covered and when or if claims can be brought
- Indemnity typically applies regardless of what caused the loss, even when negligence or breach of duty is present
Knock-for-knock clauses can benefit both parties by offering certainty and clarity in the business relationship. They can add transparency while reducing the chance of litigation or arbitration and may avoid duplication in insurance coverage.
Considerations when drafting the clause
The parties involved should consider several areas when drafting an indemnity agreement, including:
- Indemnity limits: Should only the contracting parties be included, or will protections extend to third parties, such as subcontractors and others?
- Types of loss included: Will the agreement be limited to deaths, injuries and property damage? Will other losses, such as costs of environmental harm or loss of profit, be included?
- Negligence and misconduct: Will a distinction be made between losses incurred due to “simple” negligence and “gross” negligence? In some cases, you will want to define these terms. Also, how will losses be handled due to willful misconduct by one party?
- Recovery: Is there a duty to mitigate losses? Do insurance proceeds or other mitigating factors affect the indemnity or should they be fully compensated?
While knock-for-knock indemnities can be complex provisions, both parties should remember the big picture. In many cases, they provide certainty and stability by creating a mechanism to reduce conflict and avoid potentially lengthy litigation.