What is an indemnification clause? (and when it's dangerous)
What is a indemnification clause?
To indemnify someone means to cover their losses, costs, and legal fees if a specified problem arises. Most commercial contracts include mutual indemnities for things like IP infringement, data breaches, and third-party claims. The danger is in the scope: who indemnifies whom, for what, and up to what limit.
Why it matters
Indemnification is the single biggest source of unexpected financial exposure in a contract. A broad indemnity stacked on top of an uncapped liability clause can expose you to losses many multiples of the deal value — including the other side's attorney fees.
Red flags to watch for
- One-way indemnity — only you indemnify them, not the reverse
- Indemnity that sits outside the liability cap (so it's effectively unlimited)
- Duty to indemnify for the other party's own negligence
- Vague triggers like 'any claim arising from this agreement'
- Obligation to defend (pay legal fees up front) on top of indemnify
Safer language to ask for
Make indemnities mutual, tie them to specific causes (IP, confidentiality, gross negligence), and explicitly subject them to the agreement's liability cap.
Example: before & after
Risky
The Supplier shall indemnify the Customer against any and all claims, losses, and expenses arising out of or related to this Agreement.
Safer
Each party shall indemnify the other against third-party claims arising from its breach of confidentiality or infringement of intellectual property, subject to the limitation of liability in Section X.
FAQ
Is an indemnification clause normal?
Yes — mutual, scoped indemnities are standard. It's the one-sided or uncapped versions that should give you pause.
Should indemnity be capped?
Ideally it should sit within the liability cap. Carve-outs (e.g. IP, confidentiality) are common, but a fully uncapped indemnity is a major risk.
Check your own contract
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