The Indemnity Agreement Unbundled

You’ve just landed a huge new client, and the contract is in your inbox. As you scroll through, your eyes glaze over at the legalese. Then you hit it: the indemnity clause. It’s long, dense, and full of “heretofores” and “parties of the first part.” But buried in that complex language is a critical question: If something goes wrong, who pays the bill?

Without the intimidating jargon. At its heart, an indemnity agreement is simply a promise to have someone else’s back financially. It’s the contract’s way of saying, “If we get sued because of X, you’re covering the legal fees and damages.”

This guide will walk you through indemnity agreements in plain English, so you can sign your next contract with confidence.

What is an indemnity agreement?

An indemnity agreement (sometimes called a “hold harmless” clause) is a way to assign that risk upfront. One party (the “indemnitor”) promises to protect the other party (the “indemnitee”) from potential financial losses or lawsuits.

In simple terms, If a third party sues your business partner because of something you did, your indemnity clause means you are responsible for the costs, not them.

These clauses are the backbone of everything from hiring a freelancer to multi-million dollar mergers. They ensure the party that can best control a risk is the one who bears it.

An indemnity agreement is a risk-shifting mechanism, not just a general promise. Its precise wording determines who pays when things go wrong.

Why your business needs an indemnity agreement

Indemnity agreements are not just legal formalities; they are strategic risk management tools. Consider these real-world scenarios where they are essential:

• Hiring contractors: If a subcontractor you hire causes property damage, a well-drafted indemnity clause can protect your company from being solely liable.
• Mergers and acquisitions: In an M&A deal, indemnity provisions protect the buyer from unforeseen liabilities, such as tax issues or environmental cleanup costs that emerge after the sale.
• Licensing intellectual property: If you license software to a client and they are sued for infringement, an indemnity clause can specify who covers the legal defense and damages.

Read also: SaaS Agreement Essentials

The benefits are risk transfer, financial protection, and a legal safety net. But, it’s crucial to know when such an agreement isn’t the solution. For instance, indemnity policies are forward-looking, not retrospective. You cannot use one to cover a risk that has already materialized.

Types of indemnity agreements (with examples)

Not all indemnity clauses are created equal. The scope of the obligation can vary significantly. Here are the three primary types of legal teams encounter.

Broad form indemnity

This is the most extensive—and often most risky—type for the indemnitor. In a broad form agreement, Party A agrees to protect Party B from all losses related to a claim, even if the loss is caused solely by Party B’s negligence.

Example: A property lease stating the tenant must indemnify the landlord for any and all claims arising on the premises, including those resulting from the landlord’s own failure to maintain the property. The enforceability of such clauses is often limited by state statutes.

Intermediate form indemnity

This is more balanced and very common. You cover losses caused by either party’s negligence, but you’re off the hook if the loss was caused solely by the other party’s mistake.

Example: A construction contract where the subcontractor indemnifies the general contractor for injuries to workers, except those injuries resulting solely from the general contractor’s negligence.

Read also General Services Agreement Essentials

Comparative form indemnity

Also known as “comparative fault” indemnity, this is the fairest and most modern approach. The indemnitor’s obligation is proportionate to their degree of fault in causing the loss.

Example: An agreement stating that if a joint product development leads to a patent infringement claim, each company will bear a share of the losses equal to their assessed percentage of fault.

Direct damages vs. indemnification: A critical distinction

Legal teams must understand the fundamental difference between these two concepts, as they are often governed by separate contract sections with different financial caps.

Read also the Guide to Limitation of Liability

Key contract terms in an indemnity agreement

When reviewing or drafting an indemnity clause, paying close attention to these components is essential to managing contractual risk.

1. Scope of coverage

This is the heart of the clause, defining the specific scenarios that trigger the indemnity obligation. The breadth of this definition is often the most negotiated point. Levels of scope include fault-based, broad form, intermediate or “blanket” form.

2. Indemnification clause

This is the actual promise to defend and reimburse. A robust clause will specify that the indemnitor must not only pay for final judgments but also cover attorney’s fees, court costs, and settlements incurred during the legal defense.

3. Exceptions and limitations

Well-drafted clauses include carve-outs to prevent unfair outcomes. Common exceptions exclude indemnity if the loss was caused by the indemnitee’s sole negligence, or if the damages are indirect, consequential, or unforeseeable.

4. Governing law and jurisdiction

This specifies which state’s or country’s laws will be used to interpret the agreement and where any lawsuits must be filed. This is critical for consistency and predictability in enforcement.

5. Duration and termination

How long does the indemnity obligation last? For IP infringement, it might be perpetual. For construction defects, it might extend for a set number of years after project completion. The clause should clearly state the indemnification period.

6. Settlement and consent clause

This is a critical procedural safeguard for the party paying the indemnity (the Indemnitor). It governs who has the right to control the defense of a claim, including the power to settle.

Read also A Practical Guide to the MSA Agreement 

5 key questions to ask before signing

Before your team agrees to an indemnity clause, always run through this checklist. Source: The Cor Collective Article

1. What exactly am I covering? Is the scope limited and clear?
2. Is this a one-way street? Push for a mutual indemnity where both parties protect each other.
3. What are the limits? Look for exclusions for the other party’s negligence or for indirect damages.
4. Who holds the reins in a lawsuit? Make sure you control the defense if you’re paying for it.

Can I actually insure this risk? This is the most important question. If your insurance policy doesn’t cover the liability you’re assuming, your business assets are exposed.

Read also: The Complete Guide to AI Contract Review

Risks and limitations you should know

The value of a contractual indemnity depends on the transactional risks it is designed to cover. Here’s how it applies in different contexts, as highlighted in the source material:

1. Sales of goods: To compensate costs incurred by a buyer due to a defective product.
2. Partnerships and JVs: To cover losses or expenses incurred by one member due to the actions of another.
3. M&As: To indemnify buyers for specific risks like tax liabilities and environmental law violations.
4. Intellectual Property: To indemnify a licensee for all damages arising from infringement claims.

It’s vital to remember that no indemnity can protect you for illegal acts. Furthermore, you should always negotiate for indemnity caps and other financial limits to avoid the risk of overcommitting to potentially catastrophic liabilities.

How to write (or review) an indemnity agreement

For legal teams, a meticulous approach is key.

• Consider state and country laws: Many jurisdictions have anti-indemnity statutes that invalidate certain types of clauses, particularly those that indemnify a party for its own negligence.
• Draft the contract in plain terms: Avoid unnecessary legalese. Clarity reduces the potential for future disputes.
• Watch for red flags: Be wary of undefined terms, overly broad scopes like “any and all claims,” and a lack of monetary or time limitations.

Read also: Contract Summary Explained

Indemnity agreements in insurance and business contracts

While the concept is similar, indemnity works differently in insurance versus contracts. Insurance is a two-party agreement where you pay a premium to a carrier for a promise of indemnification against specific losses. Contractual indemnity is a three-party risk allocation between you, your contracting partner, and a potential third-party claimant.

Real-world examples include property leases, subcontracting agreements, and event hosting contracts. A powerful, large-scale example is the indemnity structure used in COVAX, the global COVID-19 vaccine initiative.

A case study: Indemnity in COVAX

According to an analysis published by the NIH, the COVAX facility created a sophisticated risk-sharing model to balance vaccine access with liability concerns [Source: PMC].

• Context: Vaccines were developed rapidly with limited long-term safety data. Manufacturers demanded strong legal protection to supply doses globally, especially to low- and middle-income countries (LMICs).
• The Ask: Manufacturers sought full indemnity from lawsuits. In return, COVAX required governments to assume liability and established a No-Fault Compensation Program for individuals harmed by vaccines.
• The Precedent: This mechanism balanced access with liability risk, setting a model for managing legal and financial risks in future global health crises.

Wrapping it up

Indemnity agreements are powerful but complex tools. For legal and compliance teams, mastering their nuances is essential for protecting organizational assets. Remember to clearly define the scope, push for mutual obligations where appropriate, and always ensure your insurance aligns with your contractual risks. For highly complex or high-value agreements, seeking specialized legal advice is paramount. Using digital contract management software can help your team standardize contract clauses, track obligations, and mitigate risk efficiently.