Indemnity in Contracts: How Risk Gets Shifted
What Is Indemnity?
Indemnity is a contractual obligation where one party agrees to compensate the other for certain losses, damages, or liabilities. In practical terms, if something goes wrong and the indemnifying party is responsible, they agree to cover the costs — including legal fees, settlements, and judgments.
Indemnity vs. Indemnification
These terms are closely related:
- Indemnity: The broader concept of one party protecting another from loss
- Indemnification: The specific act of compensating for a loss that has occurred
In contracts, the terms are often used interchangeably, though "indemnification clause" is the more common label for the actual contract provision.
How Indemnity Clauses Work
A typical indemnity clause includes:
- Triggering events: What types of claims or losses activate the obligation (e.g., third-party lawsuits, IP infringement, breach of the agreement)
- Scope of coverage: What costs are covered (legal fees, settlements, judgments, damages)
- Procedure: How the indemnified party must notify the indemnifying party and whether the indemnifying party controls the defense
- Limitations: Caps on indemnification amounts or exclusions for certain types of claims
Mutual vs. One-Sided Indemnity
- Mutual indemnity: Both parties agree to indemnify each other for their respective actions. This is generally considered balanced.
- One-sided indemnity: Only one party provides indemnification. This can be appropriate in some contexts (e.g., a vendor indemnifies a client for IP infringement) but is a red flag when applied broadly.
Red Flags
- One-sided indemnity that makes you responsible for losses you did not cause
- No cap on indemnification obligations
- Indemnity triggered by the other party's own negligence
- No requirement for the indemnified party to mitigate damages
- Indemnity obligations that survive indefinitely after the contract ends
When to Consult a Lawyer
Consider consulting an attorney if the indemnity clause is one-sided, uncapped, or covers scenarios beyond your control. Indemnity provisions can create significant financial exposure and are among the most negotiated terms in commercial contracts.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.