Indemnification Baskets Explained in Plain English
What Is an Indemnification Basket?
An indemnification basket is a minimum threshold of losses that must accumulate before one party can make an indemnification claim against the other. Think of it like a deductible on an insurance policy — small losses are absorbed by the injured party, and the indemnifying party only becomes responsible once losses exceed the basket amount.
This provision is standard in M&A purchase agreements and many commercial contracts.
Deductible Basket vs. Tipping Basket
There are two fundamentally different types:
Deductible basket (true deductible) — The indemnifying party only pays losses above the basket amount. If the basket is $100,000 and losses total $150,000, the indemnifying party pays $50,000.
Tipping basket (first dollar) — Once losses exceed the basket threshold, the indemnifying party pays all losses from the first dollar. Using the same example, the indemnifying party would pay the full $150,000.
The distinction between these two types can mean significant money, so it is critical to understand which type your contract uses.
Typical Basket Amounts
- Baskets usually range from 0.5% to 1.5% of the total deal value
- Larger transactions tend to have proportionally smaller basket percentages
- Some agreements use both a mini-basket (per-claim threshold) and a general basket (aggregate threshold)
What to Watch For
- Ambiguous language — If the contract does not clearly specify deductible or tipping, disputes are likely
- Excluded claims — Fraud, fundamental representations, and tax claims are often carved out and not subject to the basket
- Mini-basket traps — Per-claim minimums can prevent you from ever reaching the aggregate basket if each individual claim falls below the mini-basket
When to Consult a Lawyer
The interplay between baskets, caps, and carve-outs can be complex. Consider having M&A counsel review these provisions to ensure you understand your actual exposure or recovery rights.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.