What is an Indemnity Clause?

The plain-English definition

An indemnity clause is a provision that requires one party — the indemnifier — to cover certain losses, costs, damages, or claims suffered by the other party — the indemnified party — as a result of specified events.

In plain English: if something goes wrong that falls within the indemnity's scope, the indemnifying party pays — regardless of who was at fault, and sometimes even if the other party contributed to the loss.

A typical indemnity clause might read: "The Supplier shall indemnify, defend and hold harmless the Client against all claims, losses, damages, costs and expenses arising from or in connection with the Supplier's performance of its obligations under this agreement."

Why indemnity clauses matter more than most people realise

Indemnity clauses are frequently more dangerous than they appear because:

• They are often uncapped — Many contracts carve indemnities out of the liability cap, meaning the indemnifying party faces unlimited financial exposure
• They cover third-party claims — An indemnity for IP infringement or data breach may require you to defend and pay third-party legal claims against the other party, not just compensate them directly
• They can be one-sided — A contract that requires you to indemnify the other party, without a reciprocal obligation on them, creates asymmetric risk
• They compound with insurance requirements — Broad indemnities often require you to carry insurance for specific risks, with the counterparty as an additional insured

Types of indemnity clause

Indemnity clauses come in several forms:

• Mutual indemnity — Both parties indemnify each other for their own negligence or breach (market standard)
• One-sided indemnity — Only one party carries the indemnity obligation (common in supplier-drafted contracts; worth pushing back on)
• IP indemnity — One party indemnifies the other against claims that the contract materials infringe third-party intellectual property rights
• Data breach indemnity — One party covers claims arising from a data protection failure
• Third-party claims indemnity — Covers losses arising from claims made by people or entities who are not party to the contract

Common red flags to watch for

When reviewing an indemnity clause, the following are warning signs that warrant negotiation:

• Broad scope language — Phrases like "arising out of or in connection with" are very broad; "arising directly from" is narrower and better
• Carve-out from liability cap — If the indemnity is not subject to the contract's liability cap, your exposure is unlimited
• Consequential loss coverage — An indemnity that includes lost profits, loss of opportunity, or reputational damage can dwarf the direct losses
• Defend and hold harmless language — Requires you to pay the other side's legal costs in defending third-party claims, not just compensate for their losses
• Indemnity without fault requirement — Some indemnities trigger on outcome alone, not negligence or breach

How to negotiate an indemnity clause

Practical negotiation steps:

• Make it mutual — If you indemnify them, they should indemnify you for equivalent risks on their side
• Bring it within the liability cap — Unless there is a compelling reason (fraud, wilful misconduct), the indemnity should sit within the overall liability cap
• Narrow the trigger event — Tie the indemnity to specific acts, such as negligence or wilful breach, not broad "arising in connection with" language
• Exclude consequential losses — Limit the indemnity to direct, provable losses rather than indirect or consequential losses
• Add a notice requirement — Require timely notice of any claim before the indemnity obligation is triggered, giving you the opportunity to investigate and mitigate

What Clavico checks for

When you scan a contract with Clavico, indemnity clause analysis is one of the core risk checks in the revenue leakage assessment:

• Is the indemnity mutual or one-sided?
• Is it capped or uncapped?
• What events trigger the indemnity obligation?
• Does it include third-party claims and legal defence costs?
• Is it proportionate to the contract value and risk profile?

You get a plain-English explanation of what the indemnity means for your business, a risk rating (Low / Medium / High / Critical), and specific negotiation language — in under 3 minutes.

Clavico starts at $39 for 1 scan, or $99 for a 5-scan pack.