Indemnity vs. liability cap: which one wins?
Contracts often cap liability, then carve indemnities out of the cap — quietly creating unlimited exposure. Learn how the two clauses interact and how to read them together.
The short answer
The limitation of liability clause caps what you can owe. The indemnity clause creates specific debts. When a contract says indemnities are "not subject to" or "excluded from" the cap, the indemnity becomes unlimited — often the single largest risk in the document, hidden in one sentence. Always read these two clauses as a pair.
The interaction nobody reads
A contract caps liability at the fees paid — say $50,000. Comforting. Three sections later, the indemnity says you will cover all losses from IP infringement, data breaches, or your negligence, with no cap mentioned. Then a sentence in the limitation clause: "Nothing in this section limits liability under the indemnification clause."
Result: the $50,000 cap protects you from contract and negligence claims, but the indemnity — the clause most likely to produce a seven-figure claim — sits outside it entirely.
When uncapped indemnities are normal
Some carve-outs are market standard: indemnities for IP infringement and gross negligence are commonly uncapped, on the theory that these are risks the giving party fully controls and should insure.
Others are aggressive: uncapped indemnities for "any breach of this Agreement" effectively delete the liability cap, because almost any claim can be framed as a breach. That is the version to fight.
- Usually acceptable uncapped: IP infringement, gross negligence, wilful misconduct, fraud.
- Often capped by negotiation: data breach, confidentiality breach, general third-party claims.
- Red flag uncapped: "any breach", "any claim arising from the services".
Super-caps: the middle ground
When a full cap feels too tight and no cap feels too loose, the standard compromise is a super-cap: indemnities and data breaches capped at a higher multiple — two or three times the annual fees — instead of the normal cap.
This is one of the most commonly negotiated points in B2B contracts, and vendors expect it. Asking for a super-cap is not awkward; it is routine.
Check both directions
The cap and carve-outs usually apply to both sides. If you negotiate the vendor's indemnity down into the cap, your own indemnity often follows it. Decide which side of that trade you are on before you negotiate.
Also check what else the limitation clause excludes: many exclude indirect and consequential losses entirely, which can quietly remove most of the money a breach would actually cost you.
Sample clause language
Illustrative wording, written for this guide — not copied from any real contract.
Neither party's aggregate liability shall exceed the fees paid in the 12 months preceding the claim, except that liability under the indemnification clauses and for data breaches shall not exceed three (3) times such fees, and nothing limits liability for fraud, gross negligence, or wilful misconduct.
A cap, a higher cap for the dangerous stuff, and the standard uncapped exceptions — a mature, balanced structure.
Vendor's total liability shall not exceed the fees paid in the prior month. The indemnification obligations in Section 9 (covering any breach of this Agreement) are not subject to any limitation of liability.
A tiny cap for you, an unlimited uncapped indemnity for everything they might claim — the worst of both worlds.
Red flags to look for
- Indemnities for "any breach of this Agreement" carved out of the cap — the cap is illusory.
- Asymmetric structure: their liability capped, yours carved out.
- A liability cap measured in one month of fees for a service your business depends on.
- Exclusion of "all indirect and consequential losses" with no carve-back for data breaches or confidentiality.
- Indemnity obligations that survive termination forever, outside any cap.
What to ask for
- Propose a super-cap (2–3× annual fees) for indemnities and data breaches.
- Limit uncapped exposure to IP infringement, fraud, gross negligence, and wilful misconduct.
- Make every limitation mutual — same caps and carve-outs in both directions.
- Carve confidentiality and data-breach claims back into recoverable losses.
- Confirm your insurance actually covers the uncapped exposures you accept.
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Frequently asked questions
Is an uncapped indemnity ever acceptable?
For IP infringement caused by your own product, yes — it is market standard and insurable. For broad 'any breach' indemnities, no — that structure removes the liability cap in all but name.
What is a super-cap?
A higher liability cap for specific risks — typically indemnities and data breaches — set at a multiple of the normal cap. It is the standard compromise between 'capped' and 'unlimited'.
Which matters more: the cap number or the carve-outs?
The carve-outs. A $1M cap with 'any breach' indemnities excluded is worth less than a $100k cap with narrow, standard exclusions. Read the structure before the number.
Related guides
This guide is general educational information about how these clauses usually work. It is not legal advice, and contract law differs by jurisdiction. For a decision that matters, speak to a qualified lawyer.