Indemnification (in government contracts)

Indemnification provisions in federal contracts are more constrained than in commercial contracting because the Anti-Deficiency Act limits the government's ability to commit to unlimited future payments. Understanding what the government can and cannot indemnify is essential for accurately pricing risk in federal proposals.

What is Indemnification in Government Contracts?

Indemnification is a contractual obligation by one party to compensate the other for specified losses, damages, or liabilities arising from the contract. In federal contracting, the government's power to indemnify contractors is limited by statute. The most significant example of government indemnification is the Public Law 85-804 authority, which allows DoD and certain other agencies to provide indemnification to defense contractors against unusually hazardous or nuclear risks that exceed the contractor's ability to obtain commercial insurance at a reasonable cost. The indemnification covers third-party claims arising from the nuclear or unusually hazardous activity. For standard commercial and services contracts, the government does not typically indemnify contractors for third-party claims. Instead, contracts generally require contractors to carry commercial general liability insurance and to indemnify the government against claims arising from the contractor's own negligence. The contractor is expected to carry commercial insurance for risks within normal business exposure and to price contract risk accordingly.

Why indemnification matters for government contractors

Contractors pursuing work involving nuclear materials, certain biological agents, experimental technologies, or other unusually hazardous activities need to understand what indemnification protection the government can provide. For standard contracts, the contractor must self-insure or obtain commercial coverage because the government will not indemnify the contractor for ordinary business risks.

Example

A contractor performing specialized work at a DoE nuclear facility requests P.L. 85-804 indemnification from the contracting officer, covering third-party nuclear incident claims above the contractor's commercially insurable limit. The DoE contracting officer, with appropriate approval authority, includes the indemnification clause in the contract.

Frequently Asked Questions

Can the government agree to open-ended indemnification?

Generally no. The Anti-Deficiency Act prevents the government from obligating funds not yet appropriated. Indemnification clauses that create unlimited future payment obligations require specific statutory authority such as P.L. 85-804.

What is P.L. 85-804?

Public Law 85-804 authorizes the President to authorize specific agencies to indemnify defense contractors against losses from unusually hazardous or nuclear risks when doing so is in the national defense interest.

Does a standard government services contract include contractor indemnification?

Standard contracts typically require the contractor to indemnify the government, not the reverse. Contractors cover their own liability exposure through commercial insurance policies specified as contract requirements.

Is indemnification the same as limitation of liability?

No. Indemnification determines who bears the loss. Limitation of liability caps the maximum exposure. Both can appear in the same contract governing different aspects of risk allocation.

What insurance is typically required of contractors?

Contracts commonly require commercial general liability, professional liability (errors and omissions), workers' compensation, and automobile liability insurance, with minimum coverage amounts specified in the contract.