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What does the assumption of liabilities agreement entail?
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In this article, I will break down the meaning of an Assumption of Liability Agreement so you know all there is to know about it!
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What Is Assumption of Liability Agreement
An assumption of liability agreement is a legal contract where a third party assumes the liability for the benefit of another party.
In other words, when you sign an assumption of liability agreement, you are “assuming” or “taking on” another person or company’s liability under the law or a contract.
For example, Company A has entered into a loan agreement with a bank to purchase some equipment.
Company A sells the equipment to Company B who agrees to take over the loan and the bank agrees to have Company B assume the loan.
Company A, Company B, and the bank will enter into an Assumption of Liability Agreement where Company A’s obligations under the loan agreement are transferred to Company B.
As a result, going forward, Company B will inherit the rights and obligations under the loan contract.
Assumption of Liability In Contracts
In contracts, an assumption of liability agreement is a legally binding contract where a party assumes another party’s contractual obligations.
For example, in the context of an asset purchase agreement, merger agreement, or loan agreement, the seller or transferor will want to have the buyer or transferee assume all contractual liabilities going forward.
As a result, as part of the transaction, the buyer will execute an assumption of liability agreement where it agrees to become legally liable for the seller’s obligation under a specific contract.
An assumption of liability agreement can be a standalone agreement or in some cases the parties will include an assumption of liability clause in another contract.
Here are some examples of assumption of liability clauses to better illustrate the concept:
It is hereby agreed that, with effect from the Effective Date, the New Member shall be, and is hereby made, an additional party to the Principal Agreement and the Principal Agreement shall henceforth be construed in all respects as if references to the “Members” included reference to the New Member in addition to the Current Members. The New Member hereby agrees with the Current Members and the Manager that, as and with effect from the Effective Date, it shall, severally with the Current Members (and proportionally with their participation percentages as per the Revenue Sharing Key), assume and duly and punctually perform all the liabilities and obligations whatsoever from time to time to be performed or discharged by the Members under the Principal Agreement and shall be bound by the terms of the Principal Agreement as if the New Member had at all times been named therein as a Member.
Contractor agrees to accept exclusive liability for the payment of income taxes. Contractor further agrees to comply with all valid administrative regulations respecting the assumption of liability for such taxes and contributions.
Assumption of Liability In Insurance
Assumption of liability agreement in insurance is when there is an agreement between a reinsurer and an insurance company that has issued a policy for an insured.
In this context, the reinsurer will have direct liability in favor of the insured when the policy-issuing company becomes insolvent and cannot issue a payout.
According to IRMI, the reinsurance company is generally licensed in the state where the insured requires coverage and these types of agreements are almost always made between affiliated insurers.
Assumption of Liability Agreement Form
An assumption of liability form is a template or document containing standard language for the assumption of liability by a party.
In the assumption of liability form, you’ll typically have the following content:
- The name of the parties
- The parties’ address
- An assumption of liability clause
- Release and waiver clause
- Form date
- Signature block
More complex forms will include other provisions such as indemnification clauses and other protective clauses between the party transferring liabilities and the party assuming them.
Liability Assumption Agreement Takeaways
So there you have it folks!
An assumption of liability contract, as the name suggests, is a type of contract where one party assumes the legal or financial liabilities of another party.
Assumption of liabilities means that the “liabilities” are “given” or “transferred” to another.
A valid agreement can be signed by completing an assumption of responsibility form containing standard language or you can have a customized agreement drafted for a specific transaction.
Now that you know what an assumption of liability agreement means and how it works, good luck with your contract negotiations!
If you enjoyed this article on the Assumption of Liability Agreement definition, I recommend you look into the following legal terms and concepts. Enjoy!
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