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Chapter 25 - IT Contract Formation

25.8 VITA recommendations for a successful IT contract

25.8.19 IT indemnification contractual language

An agency that licenses or acquires technology from an IT supplier should include a provision in its IT contract for the supplier to indemnify the agency for claims from third parties arising out of the failure of any warranties or the supplier's breach of the agreement. The Commonwealth cannot indemnify. Here is a sample indemnity clause:

"
  1. Indemnification Generally

    Supplier shall defend, indemnify, and hold harmless the Commonwealth and agencies, and their officers, directors, agents, and employees (collectively "Commonwealth Indemnified Parties") from and against any and all third-party losses, damages, claims, demands, proceedings, suits and actions, including any related liabilities, obligations, losses, damages, assessments, fines, penalties (whether criminal or civil), judgments, settlements, expenses (including attorneys' and accountants' fees and disbursements), and costs (each a "Claim" and, collectively, "Claims") to the extent the Claims in any way relate to, arise out of, or result from:

    1. any negligent act, negligent omission, or intentional or willful conduct of Supplier or any Supplier Personnel;

    2. a breach of any representation, warranty, covenant, or obligation of Supplier contained in this Contract;

    3. any defect in the Supplier-provided products or services; or

    4. any actual or alleged infringement or misappropriation of any third party's intellectual property rights by any of the Supplier-provided products or services.

  2. Defense of Claims

    Supplier will be solely responsible for all costs and expenses associated with the defense of all third-party Claims against Commonwealth Indemnified Parties. Selection and approval of counsel, and approval of any settlement, shall be accomplished in accordance with all applicable laws, rules, and regulations.

  3. Duty to Replace or Reimburse

    In the event of a Claim pursuant to any actual or alleged infringement or misappropriation of any third party's intellectual property rights by any of the Supplier-provided products or services, or Supplier's performance, Supplier shall, at its expense and option, either (a) procure the right to continue use of such infringing products or services, or any components thereof; or (b) replace or modify the infringing products or services, or any components thereof, with non-infringing products or services satisfactory to VITA.

    In the event that an Authorized User cannot use the affected Deliverable, Product, Licensed Services, or Services, including any Components, then Supplier shall reimburse such Authorized User for the reasonable costs incurred by such Authorized User in obtaining an alternative product or service.

  4. Supplier Dispute of Obligation to Indemnify

    If a Claim is commenced against any Commonwealth Indemnified Parties by a third party alleging an infringement of the third party's intellectual property rights and Supplier is of the opinion that the allegations in the third-party Claim, in whole or in part, are not covered by the indemnification provision in this Contract, then In the event that Supplier disputes any of its obligations to defend or indemnify any Commonwealth Indemnified Party, then Supplier shall immediately notify VITA and the affected Authorized User(s) in writing and shall, nonetheless, take all reasonable steps to protect the rights, remedies, and interests of the Commonwealth Indemnified Parties in the defense of the Claim, including to secure a continuance to permit VITA and the affected Authorized User(s) to appear and defend their interests in cooperation with Supplier as is appropriate, including any jurisdictional defenses VITA or the affected Authorized User(s) may have."

A provision placing liability on the supplier will not help the agency if the supplier does not have adequate resources to pay. Accordingly, the agency may want the supplier to carry insurance covering the indemnified risks. Agencies may want to require that suppliers provide proof of general liability insurance and professional liability coverage, naming the agency as additional insured. The contract should state the required limit of the policies (usually at least $1 million for each occurrence) and require the supplier to produce certificates of insurance to show that the required policies are in effect. As an added protection, the agency may require that it be added as an additional named insured to the Supplier's insurance policy.