Guide
Indemnity clauses explained in plain English
An indemnity clause can turn a small contract into a large risk, because it can make you pay for losses you didn’t cause. Here’s what the wording means, which indemnities are common, and what to ask for.
In short
An indemnity clause is a promise to cover the other side’s losses if a specified thing happens, most often a claim against them by a third party. It can reach further than an ordinary claim for breach of contract, because it may not need any fault on your part, and it often sits outside the liability cap. The more balanced versions cover third-party claims only, are limited to risks you control (such as your work infringing someone else’s intellectual property), are capped or insured, and let you control the defence of any claim you’re paying for.
What is an indemnity clause?
An indemnity clause is a promise in a contract to cover the other side’s losses from specified events, most often claims brought against them by someone outside the contract (third-party claims). In US contracts it’s usually called an indemnification clause.
Take a client who is sued by a photographer claiming that an image you chose for their website was used without a licence. An intellectual property indemnity could make you responsible for what that claim costs the client: damages, any settlement and legal fees.
Every indemnity answers four questions:
- Who is protected? Just the other party, or its group companies, staff and customers too?
- What triggers it? A specific risk you control, or anything connected with the contract?
- Which losses count? Only what a third party recovers, or the other side’s own losses too?
- What limits apply? Is it capped, and who controls the defence of a claim?
What does indemnify mean?
To indemnify someone means to make good their loss: you promise that if a particular thing happens, you’ll pay for the harm it causes them. The person giving the promise is the indemnifier (in the US, often the “indemnitor”) and the person protected is the indemnified party (the “indemnitee”). In effect, an indemnity makes you the other side’s insurer for the risks it names.
How is an indemnity different from a claim for breach of contract?
A claim for breach of contract needs a breach: you have to show the other side broke a term, that this caused your loss, and that the loss is of a kind the law lets you recover. An indemnity is triggered by whatever event the clause names, which may involve no breach and no fault at all.
| Question | Claim for breach | Claim under an indemnity |
|---|---|---|
| What starts it? | The other side breaks a term of the contract. | Whatever event the clause names, which may not need any breach or fault. |
| What must be shown? | The breach, that it caused the loss, and that the loss isn’t too remote. | That the event happened and the loss falls within the clause’s wording. |
| Does mitigation apply? | Yes: damages can be reduced if reasonable steps to limit the loss weren’t taken. | It depends on the wording, and in English law the usual rules may apply differently. |
| Does the liability cap apply? | Usually. | Not always: indemnities are often carved out of the cap. |
In English law, depending on the wording, a claim under an indemnity may be treated differently from an ordinary claim for damages, for example on remoteness (roughly, whether the loss was outside what the parties could have had in mind when they made the contract) or on mitigation. That can make an indemnity worth more to the party that receives it than a claim for breach, and cost more for the party that gives it.
What does “indemnify, defend and hold harmless” mean?
“Indemnify, defend and hold harmless” means you’ll cover the other side’s losses from a claim, take on their defence against it, and protect them from liability for it. It’s the usual wording of an indemnification clause in US contracts, and it turns up in UK contracts too. “Hold harmless” is often treated as meaning much the same as “indemnify”, although courts in different states haven’t always read it identically. “Defend” adds a separate duty, and it can matter most.
A duty to defend can mean paying the other side’s defence costs as they arise, from the point a claim within the clause is made, before anyone knows whether it will succeed. Defending even a weak claim can be expensive, so if you take on a duty to defend, look for the right to choose the lawyers and control the defence.
9.1 Vendor shall indemnify, defend and hold harmless Company, its affiliates and their respective officers, directors, employees and agents from and against any and all claims, losses, damages, liabilities, costs and expenses (including attorneys’ fees) arising out of or relating to this Agreement or the Services, regardless of cause.
Broad and narrow triggers
The trigger is the event that makes an indemnity apply, and it does more than anything else to decide how risky the clause is. A broad trigger covers losses “arising out of or in connection with” the contract or your services; a narrow one covers only losses caused by your breach, your negligence or a specific risk you control.
“In connection with” is one of the widest phrases in contract drafting: it can reach losses with only a loose link to your work, including ones mainly caused by the other side or by someone else. Narrower clauses say “to the extent caused by”, which ties what you pay to your share of the blame.
Other things that widen an indemnity:
- It isn’t limited to third-party claims. An indemnity for “all Losses suffered by the Customer” covers their own losses too, which can turn an ordinary breach into an indemnity claim.
- “Losses” is defined widely. Indirect loss, lost profit, fines and legal fees written into the definition can bring back losses the limitation clause excludes elsewhere.
- The list of people protected is long. Group companies, officers, customers and “successors and assigns” all add to who can claim.
- There’s no exception for their own fault. Whether an indemnity covers losses caused by the other side’s own negligence depends on the wording and the law, so balanced clauses say plainly that it doesn’t.
Mutual indemnities
A mutual indemnity is one where each party indemnifies the other, usually for the risks each controls: you cover claims caused by your work, and they cover claims caused by what they supply or tell you to do.
For example, an agency might indemnify a client against claims that its original designs infringe someone’s copyright, while the client indemnifies the agency against claims arising from logos, photos or product information the client provided. Mutual only means balanced if the two promises are comparable: a broad indemnity from you and a narrow one from them is still one-sided.
Uncapped indemnities and the liability cap
An uncapped indemnity is one the contract’s limitation of liability clause doesn’t apply to, so there’s no ceiling on what you could pay under it. Contracts do this by listing indemnities among the carve-outs (the liabilities the cap doesn’t apply to), or by opening the indemnity with “notwithstanding any other provision of this Agreement”.
12.4 The limitations and exclusions of liability in this clause 12 shall not apply to the Supplier’s obligations under clause 10 (Indemnities).
Some indemnities are commonly left uncapped, particularly for third-party IP infringement claims, but an uncapped indemnity with a broad trigger can make the cap close to meaningless. Common middle grounds are a separate, higher cap for indemnity claims (a “super-cap”) or keeping the indemnity inside the main cap. Our guide to limitation of liability clauses explains how caps and super-caps work.
Conduct of claims: notice, control and settlement
A conduct-of-claims clause sets out how a third-party claim covered by an indemnity is handled: who must be told and when, who runs the defence, and who can settle. If you’re paying for a claim, these terms decide how much say you have in what it costs.
10.4 The indemnified party shall: (a) notify the indemnifying party of the claim promptly; (b) allow the indemnifying party sole conduct of the defence and settlement of the claim; (c) not make any admission or settle the claim without the indemnifying party’s prior written consent; (d) give reasonable assistance, at the indemnifying party’s cost; and (e) take reasonable steps to mitigate its losses.
If an indemnity has no conduct-of-claims terms at all, it’s worth asking for them. Many such clauses also stop the indemnifying party settling on terms that admit fault on the other side’s behalf without its agreement.
Which indemnities are common and reasonable?
The indemnities most widely accepted as reasonable are narrow ones, for risks the indemnifying party controls and can insure. Three come up often in contracts with suppliers, freelancers and agencies:
- Third-party IP infringement by your deliverables. An IP indemnity covers claims that what you delivered infringes someone else’s intellectual property, such as copyright in text, images or code. Balanced versions exclude claims caused by the customer’s changes, other material your work is combined with, or material the customer supplied, and let you fix the problem by modifying or replacing the work or getting a licence. See our guide to intellectual property clauses.
- Your breach of data protection law. If you handle personal data for the other side, an indemnity for losses caused by your breach of data protection law is common, often with its own cap.
- Injury or damage caused by your negligence. An indemnity for death, personal injury or damage to property caused by your negligence broadly mirrors liability you could face anyway, which is one reason it’s widely accepted.
Indemnities in the UK, EU and US
Courts in the UK and the US generally give effect to indemnities agreed between businesses, reading them closely according to their wording, but the usual drafting and some rules differ, and the contract’s governing law clause decides which rules apply. Check current law with a lawyer for anything important.
| Question | UK | EU | US |
|---|---|---|---|
| What’s the usual wording? | “Indemnify and keep indemnified”, with a conduct-of-claims clause. | No single form. Ireland, a common-law country, is broadly similar to the UK; elsewhere the clause is read under that country’s own rules. | “Indemnify, defend and hold harmless”, in an “indemnification” clause. |
| Who pays for the defence? | Usually covered as part of the losses, with a conduct-of-claims clause deciding who runs the defence. | It depends on the wording and the country’s law. | With a duty to defend, the indemnifier may have to pay defence costs as they arise. |
| What else is different? | In English law, an indemnity claim may be treated differently from a damages claim, depending on the wording. | Some countries, such as Germany, review standard business terms for fairness, which can extend to indemnities in standard terms. | Many states have “anti-indemnity” statutes limiting indemnities in construction contracts, typically restricting how far a party can be indemnified for its own negligence. The details vary by state. |
Check your insurance. Insurance may not cover indemnities you give in a contract beyond what you’d owe anyway, so a broad indemnity can leave your business exposed even if you’re insured. Check with your insurer or broker before you agree to one. Professional indemnity insurance (errors and omissions cover in the US) is cover for claims about your work, not the same thing as a contractual indemnity.
Red flags in an indemnity clause
The main red flags in an indemnity clause are a one-way promise, a broad trigger, no cap, and no control over claims you’re paying for. Look for these:
- Only you give an indemnity.
- The trigger is “arising out of or in connection with” the contract, or “any act or omission”, rather than your breach or negligence.
- It covers the other side’s own losses, not just third-party claims.
- It sits outside the cap and outside the exclusion of indirect loss and lost profit.
- You must “defend” but have no control over the defence or settlement.
- Nothing excludes losses caused by the other side’s own negligence or breach, or by their changes to your work.
What to ask for in an indemnity clause
Ask for an indemnity that covers third-party claims only, is triggered by things you control, is capped or insured, and gives you control of any claim you’re paying for. Specific points to raise:
- Third-party claims only.
- “To the extent caused by” your breach, negligence or wilful misconduct, instead of “arising out of or in connection with”.
- Exclusions for losses caused by the other side, their changes to your work and material they supplied.
- A matching indemnity from them where the risk runs both ways.
- The indemnity inside the liability cap, or given its own cap, with indirect loss still excluded.
- Conduct-of-claims terms: prompt notice, your control of the defence, no settlement without your consent, and mitigation.
- If the clause says “defend”: when that duty starts, and who chooses the lawyers.
- Your insurer’s or broker’s view before you sign.
A broad or uncapped indemnity in a valuable contract is worth taking to a lawyer with these questions. See how to brief a lawyer on a contract, and our list of contract red flags for other clauses to check.
How LegalSling helps
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Questions people ask
What does indemnify and hold harmless mean?
It’s a promise to cover another party’s losses from specified events, usually claims brought by third parties. “Indemnify” is the promise to pay those losses; “hold harmless” is often treated as meaning much the same, though courts in different US states haven’t always read it identically. If the clause also says “defend”, the indemnifying party may have to pay defence costs as they arise, before anyone knows whether the claim will succeed.
What is the difference between an indemnity and a warranty?
A warranty is a contractual promise that something is true or will meet a standard, for example that your work is original. If it’s broken, the other side can claim damages for breach and has to prove its loss under the usual rules. An indemnity is a promise to pay for specified losses if a particular event happens. It may not need any breach at all, and it’s often carved out of the liability cap.
What is a duty to defend?
A duty to defend is a promise, common in US indemnification clauses, to defend the other party against claims the clause covers. It can mean paying their defence costs as they arise, rather than reimbursing them at the end, and it may start as soon as a covered claim is made, before anyone knows whether it will succeed. If you take one on, look for the right to control the defence and choose the lawyers.
Is an uncapped indemnity normal?
Some indemnities are commonly left outside the liability cap, particularly for third-party claims that your work infringes someone’s intellectual property. But an uncapped indemnity means there’s no ceiling on what you could pay, and with a broad trigger it can outweigh the whole contract. Common middle grounds are a separate, higher cap for indemnity claims, or a narrower trigger. It’s worth checking with a lawyer and with your insurer before you agree.
Does insurance cover an indemnity I give in a contract?
Not necessarily. Insurance may not cover liability you take on under a contractual indemnity beyond what you’d owe anyway, so a broad indemnity can leave your business exposed even if you have cover. Check with your insurer or broker before agreeing to one, and send them the clause itself. Professional indemnity insurance covers claims about mistakes in your work; it isn’t the same thing as an indemnity you give in a contract.
Are indemnity clauses enforceable?
Between businesses, courts in the UK and US generally give effect to indemnities, reading them according to their exact wording. The details vary: in English law, an indemnity claim may be treated differently from an ordinary damages claim depending on the wording, and many US states have anti-indemnity statutes that limit indemnities in construction contracts. In the EU, it depends on the member state’s law. A lawyer can advise on a specific clause.
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