What is an indemnity agreement?
An indemnity agreement moves the cost of certain losses from one party to another. Learn how indemnity agreements work, the wording that makes them dangerous, and what to negotiate.
The short answer
An indemnity agreement is a promise that if a particular kind of loss happens, one side will cover the other side's costs — legal fees, settlements, judgments, fines. It can be a standalone document (common in construction, events, vehicle hire and volunteering) or a clause inside a bigger contract. The whole risk sits in three details: what triggers it, what costs it covers, and whether there is a cap.
Indemnity agreement vs. indemnity clause
An indemnity clause lives inside a larger contract. An indemnity agreement is the same promise written as its own document, usually because the relationship has no other paperwork: a contractor working on a site, a volunteer at an event, someone borrowing equipment or a vehicle.
The legal effect is identical. A one-page indemnity agreement can expose you to more money than a fifty-page services contract, because there is nothing else in the document limiting it.
The three things that decide how risky it is
Read past the opening sentence and find these three answers. Everything else is decoration.
- Trigger — does it apply only to your negligence, or to anything 'arising out of' or 'related to' the work? 'Arising out of or relating to' catches events you had nothing to do with.
- Scope of costs — direct losses only, or also legal fees, indirect and consequential losses, and regulatory fines?
- Cap — is the promise limited to a money amount and carved out of the contract's liability cap? Uncapped indemnities are the single most common way a small deal turns into an existential one.
Defend, indemnify and hold harmless
These three words are usually stacked together, and they are not synonyms. 'Indemnify' means reimburse a loss after it happens. 'Defend' means take over and pay for the legal fight from day one, which costs money even if the claim is nonsense and you eventually win. 'Hold harmless' is generally read as protecting against claims the other side would otherwise bring against you.
A duty to defend is often the expensive part. If you accept it, ask for control of the defence, or at least the right to approve any settlement that is paid in your name.
Insurance is the safety net — check it matches
An indemnity you cannot insure is an indemnity you pay out of your own bank account. Before signing, check that your liability policy actually covers the categories you are promising to cover, and up to the amounts involved.
Many policies exclude contractual liability you voluntarily assumed beyond what the law would impose. If your indemnity is broader than your insurance, close the gap or narrow the indemnity.
Mutual beats one-sided
In a fair commercial arrangement, both sides indemnify each other for their own fault, on the same terms and with the same cap. If the draft only runs in one direction, asking to mirror it is a reasonable, standard request — and an unwillingness to mirror it tells you how the relationship will go.
Sample clause language
Illustrative wording, written for this guide — not copied from any real contract.
The Contractor shall defend, indemnify and hold harmless the Company, its affiliates, officers and agents from and against any and all claims, losses, damages, liabilities, fines and expenses (including legal fees) arising out of or in any way relating to the Services, regardless of cause.
"Regardless of cause" means you pay even when the Company caused the problem, and there is no cap and no exclusion for indirect loss. This is a blank cheque.
Each party shall indemnify the other for direct losses, including reasonable legal fees, arising from its own negligence, wilful misconduct or breach of this Agreement. Neither party's aggregate indemnity liability shall exceed the fees paid under this Agreement in the preceding twelve months, and neither party is liable for indirect or consequential loss.
Mutual, fault-based, capped, and excludes consequential loss — the shape most insurers expect to see.
Red flags to look for
- "Arising out of or relating to" with no fault requirement.
- No monetary cap, or the indemnity is expressly carved out of the liability cap.
- Covers indirect, consequential or punitive damages, or regulatory fines.
- A duty to defend with no right to control the defence or approve settlements.
- One-directional — only you indemnify, never the other side.
What to ask for
- Ask for fault-based wording: losses "caused by" your negligence or breach.
- Cap the indemnity at a named amount or a multiple of the contract value.
- Exclude indirect and consequential losses and fines.
- Make it mutual on identical terms.
- Add a duty on the other side to mitigate and to notify you promptly of any claim.
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Frequently asked questions
Is an indemnity agreement legally binding?
Yes, if it is signed and supported by consideration it is a binding contract. Courts do sometimes refuse to enforce indemnities that try to cover a party's own gross negligence or illegal acts, and consumer protection rules can strike out extreme terms, but you should assume it will be enforced as written.
What is the difference between indemnity and liability?
Liability is the general responsibility the law already places on you for harm you cause. An indemnity is an extra, contractual promise to pay for defined losses — often broader than the law would impose, and often without needing to prove fault.
Can I sign an indemnity agreement without a lawyer?
People do it every day for low-value situations. The moment the indemnity is uncapped, covers third-party claims, or your business could not absorb a worst-case payout, get it reviewed.
Does my insurance cover an indemnity I signed?
Not automatically. Many policies exclude liability you took on by contract beyond your legal duty. Send the wording to your broker before signing.
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.