What is it?
Indemnity is a fundamental contractual clause type governing risk allocation. It dictates which party must financially absorb losses arising from defined events or claims.
indemnity
Contract LawLegal glossary term
Quick answer
Indemnity usually means a contractual promise to shield another party from specified financial losses or liabilities. In contracts, it matters because it dictates who pays when something goes wrong, like a lawsuit judgment. Before signing, check the scope: is it broad or narrowly limited?
Definitions
What is indemnity?
Legal Definition
Indemnity is a promise to hold another party harmless against specified losses or liabilities. This contractual provision obligates one party (the indemnitor) to cover the costs incurred by another (the indemnitee), such as legal fees or judgments. The scope of this obligation—whether it's broad, limited, or contingent—is what practitioners scrutinize most closely.
Plain-English Translation
It functions like a promise on a permission slip: if you break the rules and get a fine, your friend promises to pay that fine for you instead.
Contract relevance
Why indemnity matters in contracts
Ignoring an indemnity clause means one party bears the full financial brunt of another's mistake, often leading to personal liability for damages. The indemnitor carries this specific financial burden.
Document context
Where indemnity appears in documents
| Document type | Section | Why it matters |
|---|---|---|
| Service Agreement | Section 6 (Indemnification) | Determines which party covers legal defense costs if a third party sues. |
| Purchase Order | Terms & Conditions | Specifies who bears risk for defective goods delivered under the order. |
| Lease Agreement | Article VII | Dictates whether the tenant or landlord pays claims arising from property damage. |
| Software License Agreement | Clause 12.3 | Allocates responsibility if a user's use of the software infringes on another company’s patent. |
Contract language
Common contract wording
| Contract wording | Plain-English meaning | What to check |
|---|---|---|
| Indemnify, defend, and hold harmless | Means Party A pays for losses AND handles the lawsuit for Party B | Ensure 'defend' is included—it's an active obligation. |
| On a mutual basis (or 'each party indemnifies the other') | Both sides agree to cover each other’s losses when specified | This balances risk equally between signatories. |
| Indemnification for negligence alone | Only requires coverage if one side was careless | Check if it covers things like breach of contract, too. |
Red flags
Red flags to watch for
Wording examples
Clearer wording examples
Vague wording
Indemnify against all losses
Clearer wording
Indemnify only against losses specified in this section
Vague wording
Hold harmless from all claims
Clearer wording
Hold harmless only from claims arising from indemnified party's breach
Note: “clearer” means easier to read — not legally reviewed or guaranteed safe.
Pre-signature checklist
What to check before signing
1
Is the scope mutual or one-sided?
2
Does it cover 'defense costs' (legal fees) or just final judgment amounts?
3
Are there clear exclusions (carve-outs)?
4
What is the trigger event (e.g., breach, negligence, IP infringement)?
5
Does it specify who pays if both parties are partially at fault?
6
Is there a monetary cap on the indemnity obligation?
Party impact
How indemnity affects each party
| Party | What this party should check |
|---|---|
| Seller | Must ensure they indemnify the Buyer for defects in goods sold. |
| Buyer | Should ensure the Seller indemnifies them against title or IP infringement risks. |
| Tenant | Needs to confirm who covers claims arising from tenant negligence (e.g., causing a fire). |
| Indemnitor | Checks that the losses being covered are limited to things they can reasonably control. |
Comparison
indemnity vs similar terms
| Related term | Plain meaning | Main difference from indemnity |
|---|---|---|
| Hold Harmless | Similar, but often less active; it's a promise *not* to be sued or charged by the other party. | Indemnity is the mechanism (the payment/protection); Hold Harmless is the state of being protected. |
| Warranties | A statement of fact about condition (e.g., 'The software works'). | Warranty is a guarantee; indemnity is the *promise to pay* if that warranty turns out to be false. |
| Reimbursement | Paying back money already spent after the fact. | Indemnity can happen before payment is due, covering contingent future losses. |
Missing or vague
If indemnity is missing or vague
If the term lacks definition, disputes often erupt over causation—who caused the problem?
Courts will then have to apply general common law principles to fill in the gaps, which rarely matches what the parties intended.
Furthermore, without a scope limit, one party might be on the hook for every single risk imaginable, even those unrelated to their actions.
Document map
Document section map
| Contract section | What to inspect |
|---|---|
| Definitions | Look here to see if 'Indemnify' is defined narrowly or broadly within the contract itself. |
| Representations & Warranties | Check this section because indemnity obligations are usually tied directly to a specific warranty breaking down (e.g., Warranty of Title). |
| Liability/Damages | This clause sets the financial ceiling for the indemnity promise; inspect it closely. |
| Governing Law | See what state's law governs the contract, as that dictates default rules if the contract is silent on specifics. |
Visual model
Understand indemnity fast
An explainer image has not been generated for this term yet.
01
Landlord signs an indemnity agreement with Tenant; Tenant causes a fire, so Landlord is protected from insurance claims.
02
Borrower grants indemnity to Lender; Borrower defaults on a loan payment, so Lender recovers legal costs.
03
Franchisor requires Subfranchisee indemnity in the operating agreement; Subfranchisee misuses brand IP, so Franchisor pays the resulting damages.
Document context
How indemnity shows up in legal documents
Why does it matter?
Ignoring an indemnity clause means one party bears the full financial brunt of another's mistake, often leading to personal liability for damages. The indemnitor carries this specific financial burden.
When does it matter?
The obligation triggers when a covered loss occurs, such as a third-party lawsuit filing or a breach of warranty claim arising under the contract terms.
Where is it usually seen?
This concept appears ubiquitously in commercial contracts, notably within Purchase Orders, Service Agreements, and is codified heavily in UCC § 2-718.
Who is affected?
The indemnitor assumes the duty to pay; the indemnitee gains protection from loss. A subcontractor often acts as the indemnitor to the prime contractor.
How does it work?
First, a covered event happens (like an accident). Then, the injured party sues or incurs costs. Finally, the indemnitor steps in and pays those specified losses directly to the indemnitee.
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Wikipedia
Indemnity
In contract law, an indemnity is a contractual obligation of one party (the indemnitor) to compensate the loss incurred by another party (the indemnitee) due to the relevant acts of the indemnitor or any other party. The duty to indemnify is usually, but not...
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Where indemnity connects to real contract work
This layer links the term to nearby glossary entries, document use cases, and contract-risk guides so readers can move from definition to context without dead ends.
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BGRisk context hubGlossary meaning, document paths, and adjacent risk pages connected around this clause.
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Source & disclosure
This page is an AI-assisted plain-English explanation based on LexPredict Legal Dictionary context and contract-review patterns. It is not legal advice. Meaning may vary by jurisdiction, industry, and exact clause wording.
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