A contractor's indemnification clause requires them to 'hold harmless' the owner from claims arising from the contractor's negligence. The owner is sued for $500,000 due to contractor negligence and incurs $75,000 in legal fees. What is the contractor's total indemnification obligation?
Correct Answer
B) $575,000
Indemnification typically includes both the damages ($500,000) and reasonable legal fees ($75,000) incurred by the indemnified party, totaling $575,000.
Why This Is the Correct Answer
A 'hold harmless' indemnification clause obligates the indemnifying party (contractor) to cover all losses the indemnified party (owner) suffers as a result of the covered event — including both the damages judgment ($500,000) and the reasonable legal fees incurred defending or responding to the claim ($75,000). The total obligation is $500,000 + $75,000 = $575,000.
Why the Other Options Are Wrong
Option A: $425,000
$425,000 represents the damages minus the legal fees ($500,000 − $75,000), which would be the result if someone incorrectly subtracted legal fees from the judgment rather than adding them. Legal fees are an additional cost, not an offset.
Option C: $500,000
$500,000 covers only the damages judgment and ignores the $75,000 in legal fees. Full indemnification includes all reasonable costs and expenses, not just the base claim amount.
Option D: $75,000
$75,000 covers only the legal fees and ignores the $500,000 damages judgment. This reflects a fundamental misunderstanding of what indemnification requires — the indemnitor must make the indemnitee whole, covering all losses.
Memory Technique
Think of 'hold harmless' as making the owner 'whole' — every dollar they spent or lost because of the contractor's fault must be repaid. The formula is: Indemnification = Damages + Defense Costs. Add, never subtract.
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