What is Indemnification Clause? How to Implement it?
- Last Updated: Jan 06, 2025
- 8 min read
- Sirion
For every contract you execute, there’s going to be some risk involved — but that doesn’t mean you can’t do everything in your power to minimize that risk.
Indemnification clauses play a huge role in assigning legal liability in the event of a contract breach and reducing risk across commercial agreements.
In this blog, we’ll discuss indemnification clauses, why they’re necessary, and how to draft them to best protect your enterprise.
What is an Indemnification Clause?
An indemnification clause is an agreement between two parties in which one party (the indemnifying party) promises to compensate the other (the indemnified party) if they cause the other party a loss or damage.
Enforcing the clause typically requires the indemnifying party to cover the costs associated with the loss so the indemnified party doesn’t experience additional financial harm.
Purpose of an Indemnification Clause
The core purpose of an indemnification clause is to mitigate risk as much as possible for parties entering into business arrangements. You reap several benefits by including these clauses in your commercial contracts.
1. Risk Transfer
When one party takes on significantly more risk than the other, indemnification clauses offer the chance to shift that risk to another party. This lessens the amount of risk the indemnified party may assume and gives them a sense of security, knowing they won’t be as responsible in the event of loss.
2. Liability Limitations
You can use indemnification clauses to restrict the liability of a party within a contract. Doing so limits the amount of financial exposure that a party takes on, lessening their chances of experiencing higher losses or damages.
3. Term Clarification
Indemnification clauses allow you and your counterparty to explicitly define the terms and conditions that will apply if one of you should experience a loss. Establishing clear terms up front makes for much less confusion and an easier time enforcing the clause, if necessary.
4. Financial Protection
Indemnification clauses ensure your counterparty financially compensates you if their actions (or inaction) force you to experience a loss. Especially if your revenue hinges on the counterparty fulfilling contract obligations, you won’t be left high and dry if they drop the ball.
5. Contracting Assurance
Since an indemnification clause defines your terms early on, you have less overall contract risk to worry about. That means you can focus your attention on more strategic tasks.
Choosing the right indemnification clause ensures you reap every benefit of protecting your enterprise.
Are There Different Types of Indemnification Clauses?
There are several types of indemnification clauses, each one providing a different set of conditions and protections.
Bare Indemnity
Bare indemnity clauses provide complete, no-limit protection against liability or loss. You should approach this type of clause with caution since the risk you assume could be significantly high.
Limited Indemnity
As the name implies, limited indemnity clauses limit the indemnifying party’s legal liability. The indemnifying would only be liable to cover damage caused by their own delinquency.
Third-Party Indemnity
Under this type of clause, the indemnified party can claim losses resulting from the actions of a non-contracted party.
Mutual Indemnity
In this case, both parties agree to compensate each other for damages incurred due to a mutual breach of contract.
Whichever indemnification clause you choose, you must draft it carefully to ensure it’s fully enforceable.
While these clauses may seem straightforward, the legal language used—especially terms like “indemnify” and “hold harmless”—can significantly impact how the clause is interpreted and enforced.
Indemnify vs. Hold Harmless: Are They the Same?
Though often used interchangeably, “indemnify” and “hold harmless” may carry different legal interpretations depending on the jurisdiction.
- In some states (e.g., Delaware, Ohio), courts treat the two terms as synonymous.
- In others, like California, “hold harmless” may require the indemnifying party to cover costs even before a loss is paid, whereas “indemnify” may only apply after payment.
- To avoid ambiguity, it’s advisable to include both terms or clarify their scope explicitly in the clause.
Before we get into the anatomy of a well-drafted indemnity clause, it’s important to understand the types of claims it typically covers.
Direct vs. Third-Party Claims
Indemnification clauses generally apply to two types of claims:
- Third-Party Claims: These involve lawsuits or demands from a person or entity not party to the contract (e.g., a customer sues your company over a product defect caused by a vendor).
- Direct Claims: These are claims made by one contracting party against the other (e.g., one party fails to deliver services, causing financial loss to the other).
Some contracts only include third-party indemnity, which may leave internal breaches unaddressed. Be clear on which types of claims your clause covers.
What Standard Terms Do Indemnification Clauses Include?
Any clause is only as good as the components and language used to craft it. A well-drafted indemnification clause will include standard terms such as:
- Indemnification Event — What situation will trigger the indemnification obligation?
- Indemnifying Party — Which party will be responsible for paying compensation?
- Indemnified Party — Which party will receive compensation?
- Scope of Indemnification — What types of losses does the indemnification cover?
- Time Limitations for Indemnification — How long will the compensating party have to cover damages?
- Amount of Indemnification — What is the highest amount the indemnifying party will be responsible for paying?
- Subrogation — To what extent can the indemnifying party pursue compensation from a third party?
- Exclusions — Will there be any exceptions to enforcing the clause?
Typical Covered Events and Common Exclusions in Indemnification Clause
Covered Event | Description |
Breach of contract | One party fails to meet agreed obligations |
Third-party lawsuits | Claims from non-contracting entities |
Non-compliance with law | Violations of applicable legal or regulatory standards |
Bodily injury or death | Physical harm occurring during performance of contract |
Common Exclusions | Why They Matter |
Negligence or willful misconduct by indemnified party | Prevents abuse of indemnity protection |
Improper product/service use | Losses outside intended scope aren’t covered |
Known liabilities pre-signature | Should be handled through separate disclosures |
Another layer of complexity is the difference between defending a claim and covering a loss—both of which may be expected under an indemnification clause.
Understanding Defense vs. Indemnification Obligations
An indemnification clause may contain two distinct responsibilities:
- Obligation to Indemnify: Requires the compensating party to reimburse losses, such as paid legal fees or damages.
- Obligation to Defend: Requires the indemnifying party to step in early—often at the point of allegation—to cover or assume the defense, even if the claim is later proven baseless.
While the duty to defend is broader and often triggered earlier, both obligations must be clearly defined to avoid disputes over timing and cost responsibility.
Best Practices for Drafting Indemnification Clauses
How you draft indemnification clauses and the specific terms you use within them will vary based on your enterprise and the contract’s overall goals. Still, some baseline tips apply across the board.
1. Be Careful How You Use Language
The language you use (or don’t use) can result in your counterparties or a court interpreting the clause with a broader or narrower lens. Choose your position and language carefully to best support your risk reduction strategy.
2. Be Mindful of Your Jurisdiction
Certain jurisdictions interpret indemnification clauses differently. Take this into consideration as you draft and review contract language.
3. Consider How Indemnity Clauses Affect Other Clauses
Contract clauses rarely exist in a vacuum. As you draft an indemnity clause, consider how that language relates to other terms in the rest of your agreement.
Here are key interactions to keep in mind:
- Limitation of Liability – Indemnity clauses often overlap with limitation of liability clauses, which cap the amount one party has to pay the other for certain breaches or liabilities. For example, if the indemnity clause provides broad coverage for certain risks, but the limitation of liability clause imposes a strict monetary cap, the effectiveness of the indemnity could be substantially restricted.
- Insurance Provisions – Contracts can include requirements for one or both parties to maintain specific types of insurance. The scope of indemnity might depend on the coverage and limits of the required insurance policies. For instance, a party might only be required to indemnify for losses that exceed the coverage provided by insurance. This interplay should be explicitly clarified to avoid gaps in expected coverage or overlapping coverages that could complicate claims.
- Breach and Remedies – If an indemnity clause covers specific actions or inactions, it might implicitly permit certain behaviors that you’d otherwise consider breaches under different contract sections. It’s important to define clearly how indemnification interacts with the rights to terminate the contract or seek other remedies for breach.
- Warranties – A breach of warranty might trigger indemnification under certain conditions. Discrepancies between what is warranted and what is indemnified can lead to disputes and unmet expectations.
- Dispute Resolution – The procedures outlined for resolving disputes within a contract need to account for the processes involved in claiming indemnity. The dispute resolution clause should specify whether indemnity claims require mediation or arbitration first, how claims are to be documented and verified, and the timelines for such processes.
4. Leverage Tools to Improve Contract Authoring
As your business changes over time, so will the way you draft clauses. Leverage AI contract lifecycle management tools to build an approved template library to automate contract drafting for clauses that you frequently use.
5. Track Contract Terms Post-Signature
If you should experience a loss, you’ll want to know how you are protected as soon as possible. Closely monitor these clauses after execution to address problems quickly.
Checklist: Key Elements of an Enforceable Indemnity Clause
To ensure your clause holds up under legal scrutiny, here’s a quick checklist you can follow during contract drafting or review:
- Clearly identify risks and triggering events
- Include both indemnity and defense obligations (if intended)
- Specify exclusions and limitations (e.g., caps, baskets, materiality)
- Define timeframes for claim notification and reimbursement
- Align with governing law and dispute resolution terms
- Confirm interaction with insurance and liability caps
- Review enforceability in the relevant jurisdiction
Redefine Contracting and Protect Your Enterprise
Manually trying to author and manage every clause in your contract portfolio is nearly impossible. You’ll only leave yourself open to increased legal liability and the associated consequences.
With Sirion’s AI-native CLM platform, you can transform how you create, store, and optimize your agreements for a unified contracting experience.
Centralize your contracts. Standardize your processes. Keep every obligation on your radar. See the AI live.
Frequently Asked Questions
Can indemnification clauses be enforced across international contracts?
Yes, but enforceability may depend on local laws and public policy in each jurisdiction. Some countries treat indemnity and liability provisions differently, and others may limit or void certain indemnity rights entirely. Always align indemnification language with the governing law of the contract and seek jurisdiction-specific legal advice.
What’s the difference between indemnification and reimbursement?
While both involve compensating for a loss, indemnification is typically pre-agreed in a contract and may include an obligation to defend, whereas reimbursement is a reactive repayment for specific costs incurred. Indemnification can be broader in scope and proactive in nature.
Does indemnification apply to intellectual property (IP) claims?
Often, yes—especially in SaaS, technology, and licensing agreements. IP indemnification clauses protect the indemnified party if a third party alleges IP infringement related to software, content, or services provided under the agreement.
Is indemnification limited to financial losses only?
Not always. While financial compensation is the primary form, some indemnity clauses may also cover legal obligations, performance guarantees, or agreed actions to remedy a situation—depending on how the clause is drafted.
Can indemnification clauses survive contract termination?
Yes. Many contracts include a “survival clause” stating that indemnification obligations will continue even after the agreement ends. This ensures that liability for events occurring during the contract term remains enforceable afterward.
What happens if an indemnity clause conflicts with a limitation of liability clause?
Conflicts between these clauses can lead to enforcement challenges. Generally, courts try to interpret them harmoniously, but if unclear, one may override the other—especially if indemnity implies unlimited risk while liability caps suggest the opposite. Consistency in drafting is key.
Who typically drafts indemnity clauses in a contract?
Legal teams, in-house counsel, or external law firms usually draft and negotiate these clauses. Increasingly, businesses are using AI-powered CLM platforms to standardize indemnity clause templates and ensure alignment with internal risk policies.
Additional Resources
What Happens if You Break an NDA?
