Indemnity

Definition

Indemnity is a contractual obligation under which one party agrees to compensate, reimburse, or protect another party against specified losses, damages, liabilities, claims, costs, or expenses arising from defined events, conduct, or third party allegations.

What is Indemnity?

Indemnity is a core risk allocation tool in commercial contracts. It identifies which party will bear the financial consequences if a specified event occurs, such as intellectual property infringement, injury caused by a contractor, property damage, breach of confidentiality, or a tax claim created by one party’s actions.

The clause is important in procurement because contract price alone does not determine commercial value. A low cost supplier can become expensive if the buyer assumes disproportionate liability for areas the supplier controls. Indemnity language therefore translates operational risk into contractual financial responsibility.

How an Indemnity Clause Works

An indemnity clause defines the triggering event, the protected party, the party providing the indemnity, and the losses covered. It may include defense obligations, settlement approval requirements, notice periods, and procedures for handling third party claims.

Some clauses cover only external claims made by third parties. Others attempt to cover direct losses between the contracting parties as well, which can significantly broaden the commercial exposure.

Typical Covered Losses

Common indemnities address intellectual property infringement, bodily injury, property damage, employment related claims, data breaches, tax exposure, and losses caused by violation of law. The detail matters because broad words like all losses may be interpreted differently depending on jurisdiction and the contract as a whole.

Limits, Caps, and Exclusions

Indemnities are often limited through monetary caps, exclusion of indirect or consequential loss, control of defense rights, and carve outs for gross negligence, fraud, or buyer caused claims. A supplier may also insist that liability is limited to insured risks or to losses arising from its own negligence or breach.

Indemnity in Procurement

Procurement teams commonly negotiate indemnities for on site services, technology, logistics, manufacturing, and outsourced operations. The appropriate allocation should follow control of the relevant risk. For example, a software supplier may indemnify the buyer for intellectual property infringement, while the buyer may indemnify the supplier for misuse outside agreed scope.

Indemnity vs Warranty and Hold Harmless

A warranty promises that a product or service meets stated standards. An indemnity addresses who pays if a defined loss occurs. Hold harmless wording focuses on protecting a party from liability claims. Contracts often combine these concepts, but they perform different legal functions and should not be drafted as if they were interchangeable.

Frequently Asked Questions about Indemnity

Why are indemnity clauses negotiated so heavily?

Because they can shift losses that are far larger than the contract value. A seemingly routine service contract can expose a party to injury claims, system outage costs, intellectual property allegations, or regulatory penalties. Legal, procurement, and risk teams therefore examine indemnity language carefully to align liability with operational control, insurance coverage, and the commercial value of the deal.

Does an indemnity automatically require one party to pay every loss?

No. Recovery depends on the wording of the clause, the facts of the event, the governing law, and whether notice and claim handling requirements were followed. The protected party usually still needs to show that the claim falls within the agreed trigger, that the losses are recoverable under the contract, and that any exclusions or caps do not remove the amount being claimed.

Can indemnity obligations be insured?

Often yes, but not always fully. General liability, professional liability, cyber, cargo, and other policies may respond to some indemnified losses, yet policy exclusions, deductibles, and limits can leave gaps. Procurement should therefore avoid assuming that a supplier’s agreement to indemnify is sufficient unless insurance certificates, policy structure, and financial strength support that promise.

How does indemnity affect supplier pricing?

Broader indemnity obligations usually increase supplier risk and may increase quoted price, reduce willingness to bid, or narrow the suppliers able to participate. The commercial impact can be especially strong in categories with high exposure such as technology, transport, construction, and staffing. Balanced indemnity language often improves competition while still protecting the buyer against the risks the supplier actually controls.