What is an indemnity clause?
An indemnity clause decides who pays when something goes wrong. Learn what indemnification means, see one-sided vs. mutual sample language, and spot the red flags before you sign.
The short answer
An indemnity clause is a promise that one party will cover the other party's losses if a specific kind of problem happens — a lawsuit from a customer, a data breach, an infringement claim. In practice it moves financial risk from one side of the contract to the other. If you agree to indemnify someone, you are agreeing to pay their legal bills and damages for the situations the clause lists.
What indemnification actually means
Strip away the Latin and indemnification is simple: "if this goes wrong, I will make you whole." The party giving the promise is the indemnitor. The party protected by it is the indemnitee.
Three separate obligations usually hide inside one sentence, and they are not the same thing:
- Indemnify — pay for the losses, damages, and settlements.
- Defend — pay for and run the legal defence from day one, before anyone has been found liable.
- Hold harmless — do not turn around and sue the protected party over the same events.
Why the duty to defend matters more than people expect
A duty to indemnify only bites once liability is established. A duty to defend kicks in the moment a claim is filed, even a baseless one. Defence costs on a mid-sized commercial dispute routinely run into six figures before anyone reaches the merits.
If you are the one giving the indemnity, a duty to defend is often the single most expensive words in the contract. If you are receiving it, it is the most valuable.
One-sided vs. mutual indemnities
A mutual indemnity means each side covers the other for the risks it controls: the vendor covers infringement claims about its software, the customer covers claims about the data it uploaded. That is normally fair.
A one-sided indemnity means only you give the promise. Sometimes that is legitimate — a supplier really is the only party who can control product defects. Often it is just leverage. If the contract is one-sided, ask why, and ask whether the risk being shifted is actually one you can control.
How indemnities interact with the liability cap
This is the trap that catches even experienced reviewers. A contract may cap total liability at twelve months of fees, then carve indemnity obligations out of that cap. The effect is an unlimited exposure sitting quietly inside a contract that looks capped.
Always read the limitation of liability clause and the indemnity clause together. One is meaningless without the other.
Does insurance cover it?
Not automatically. Many commercial policies exclude liability that you took on by contract — "contractual liability" exclusions. Some carve back cover for liability you would have had anyway under general law.
Before you accept a broad indemnity, it is worth confirming with your broker that your policy responds to it. An indemnity you cannot insure is an indemnity your balance sheet absorbs alone.
Sample clause language
Illustrative wording, written for this guide — not copied from any real contract.
Supplier shall indemnify, defend, and hold harmless Customer and its affiliates, officers, directors, employees, and agents from and against any and all claims, losses, liabilities, damages, costs, and expenses (including attorneys' fees) arising out of or relating in any way to this Agreement or the Services.
"Arising out of or relating in any way" covers essentially everything, including losses the Customer caused itself. There is no cap, no exclusion for the Customer's own negligence, and it extends to affiliates you have never met.
Each party shall indemnify the other against third-party claims to the extent arising from the indemnifying party's gross negligence, wilful misconduct, or breach of its confidentiality obligations. The indemnified party shall promptly notify the indemnifying party of any claim, permit it to control the defence, and provide reasonable cooperation at the indemnifying party's expense.
Limited to third-party claims, tied to specific fault, proportionate ("to the extent"), mutual, and with sensible notice and control procedures.
Red flags to look for
- "Any and all claims" with no subject-matter limit.
- No "to the extent" wording — you pay 100% even if you were 10% responsible.
- Indemnity covers first-party losses, not just third-party claims.
- Indemnity obligations are carved out of the liability cap.
- You must defend but have no right to control the defence or approve settlements.
- The indemnity extends to affiliates, agents, or customers of the other side.
- It survives termination indefinitely with no time limit.
What to ask for
- Ask for mutuality — the same protection flowing both ways.
- Limit it to third-party claims only.
- Add "to the extent caused by" so liability is proportionate to fault.
- Exclude losses caused by the indemnified party's own negligence.
- Bring the indemnity inside the overall liability cap, or agree a separate super-cap.
- Add a notice deadline and the right to control the defence and approve settlements.
- Add a survival period — for example, two years after termination.
Find this clause in your own contract
Upload a PDF, Word file, or image and Lawly AI will pull out the clauses that matter, quote the exact wording, and explain the risk in plain English.
Frequently asked questions
Are indemnity clauses enforceable?
Generally yes, in commercial contracts between businesses. Courts do narrow them: many jurisdictions will not enforce an indemnity that covers the indemnified party's own gross negligence or wilful misconduct unless the wording is unmistakably clear, and consumer protection rules limit them further. Enforceability varies by jurisdiction, so check local law for anything high-value.
What's the difference between indemnity and a warranty?
A warranty is a promise that something is true. If it turns out to be false, you sue for breach and must prove your loss, causation, and mitigation. An indemnity is a promise to pay for a defined event, which is usually faster and broader because you do not have to work through those standard damages hurdles.
Should an NDA have an indemnity clause?
Most straightforward mutual NDAs do not need one — the confidentiality obligation plus injunctive relief is usually enough. If the other side inserts an indemnity into an NDA, read it closely: it is a meaningful escalation for a document people tend to sign without much thought.
What is a mutual indemnity?
Both parties give each other the same promise, each covering the risks it is best placed to control. It is the usual starting point in a negotiation between parties of similar bargaining power.
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.