Indemnification clauses in contracts: Purpose and key implications

Indemnification clauses are often one of the trickiest parts of a contract, but also one of the most important. In plain terms, these clauses explain who’s responsible if something goes wrong. If one party gets sued or loses money because of the contract, this clause says who has to pay for it.

In this article, we’ll break down what indemnification means, why it matters, and what to watch out for when reviewing or negotiating these clauses. Whether you're in legal, sales, procurement, or operations, this guide will help you understand the basics, without the legal jargon.

Main takeaways from this article:

• Indemnification clauses are crucial contractual provisions that allocate financial responsibility for specific losses.
• These clauses offer several advantages, including the distribution of financial risk and protection against claims from external parties.
• Key components include indemnifying and indemnified parties, the scope of indemnity, and the triggering events.
• Limitations and exclusions within indemnification clauses can significantly alter their effect. Careful drafting and negotiation as well as considering the specific context of the contract are crucial.
• Platforms like DocJuris can aid in the review and standardization of indemnification clauses.

What is an indemnification clause?

An indemnification clause is a part of a contract where one party agrees to cover certain costs or losses for the other party. These costs might include things like lawsuits, damages, or other financial harm that could happen while working together.

The main purpose of this clause is to protect one side from unexpected expenses caused by actions outside their control, like mistakes made by the other party or claims from a third party.

In simple terms, indemnification helps shift the financial risk from one party to another. It makes sure everyone knows ahead of time who will be responsible if something goes wrong.

The benefits of indemnification clauses

Indemnification clauses serve several important purposes within contractual agreements:

• Allocate financial risk: These clauses clearly assign financial responsibility, helping both sides understand their particular risks before signing the contract. This makes it easier to plan ahead and avoid surprises if problems come up later.
• Protect against third-party claims: If someone outside the contract (like a customer or vendor) files a claim, the clause can say which party must handle it. This protects the company from paying legal fees or damages for someone else’s actions.
• Promote responsible conduct: Knowing they’re financially on the hook, companies are more likely to follow rules and avoid mistakes. It encourages everyone to act carefully and stick to agreed terms.
• Streamline dispute resolution: With clear language about who’s responsible, it’s easier to resolve disputes quickly—without going to court. This saves time, money, and stress for everyone involved.

Key components of an indemnification agreement

An indemnity clause will have the following key elements:

1. Indemnifying party: This is the person or company (also known as the indemnitor) agreeing to pay if something goes wrong. They're the ones taking on the risk.
2. Indemnified party: This is the person or company (also known as the indemnitee) getting the protection. If a problem comes up, they’re the ones who will be covered 
3. Scope of indemnity: This explains what types of costs are covered, like legal fees, settlements, or damages. It can cover a wide range of situations—or just a few, depending on the deal, including legal fees, judgments, settlements, and other related costs. 
4. Triggering events: These are the specific things that must happen for the clause to take effect, like a contract breach or third-party lawsuit. The clearer this is, the fewer arguments later.
5. Procedures for claims: : This tells the protected party what to do if they need to ask for help—like sending notice right away, sharing documents, or cooperating in the defense.
6. Limitations and exclusions: Some indemnities don’t cover everything. This section spells out what’s not included, helping both sides understand the risks and avoid surprises. These are critical for balancing the risk allocation between the parties.

Common types of indemnity in contracts

Indemnity clauses can look different depending on the deal and how much risk each party is willing to take. Here are the most common types:

Third-party claim indemnity

This is the most common type. It protects one party if the other party causes a problem that leads to a lawsuit or claim from someone outside the contract—like a customer or vendor.

Reciprocal indemnity

In certain types of agreements, both sides agree to protect each other. It’s common in partnerships or joint projects where both parties could create risk for one another.

Limited or comparative form of indemnity

This is a more cautious approach. A party only pays for losses they directly caused—nothing more. If both sides are partly at fault, each handles their own share.

Intermediate form of indemnity

In this scenario, one party agrees to cover losses when both sides are partly at fault. The party giving the indemnity usually pays for the portion they caused.

Broad form indemnity

This type is riskier and less common. One party agrees to cover all losses, even if the other party was fully responsible. Many states don’t allow this kind of clause.

Implied indemnity

Sometimes, indemnity is assumed even if it’s not written in the contract. This usually happens by law but is rare in modern business contracts, where companies prefer to spell everything out clearly.

Limitations and carve-outs in indemnification clauses

Even though indemnification clauses are designed to protect a party, they often include rules and limits on how much protection is actually given. These help make sure one side isn’t taking on unlimited risk. These include: 

Cap on liability

This puts a maximum dollar amount on how much one party has to pay if something goes wrong. It helps keep financial risk under control and makes negotiations more balanced.

Exclusions for gross negligence or willful misconduct

Most clauses say a party won’t be protected if they acted recklessly or on purpose. For example, if someone ignores safety rules and causes damage, they’re still responsible for that.

Time limits for claims

These clauses set a deadline for reporting issues, usually one to two years after the problem happens. This keeps both sides moving quickly to resolve disputes and avoids dragging things out forever.

Sample indemnification clause

Here is an illustrative example of an indemnification clause from Bloomberg Law:

"Company agrees to protect, defend, [hold harmless,] and indemnify (collectively 'Indemnify' and 'Indemnification') [ABC], its subsidiaries, and its and their respective successors, assigns, directors, officers, employees, agents, [stockholders (in the case of a privately held company),] and affiliates (collectively, 'Indemnified Parties') from and against all claims, demands, actions, suits, damages, liabilities, losses, settlements, judgments, costs, and expenses [of or by a third party OR whether or not involving a claim by a third party], including but not limited to reasonable attorneys’ fees and costs (collectively, 'Claims'), actually or allegedly, directly or indirectly, arising out of or related to (1) any breach of any representation or warranty of Company contained in this Agreement; (2) any breach or violation of any covenant or other obligation or duty of Company under this Agreement or under applicable law; (3) any third party Claims which arise out of, relate to or result from any act or omission of Company; and (4) [other enumerated categories of claims and losses], in each case whether or not caused in whole or in part by the negligence of [ABC], or any other Indemnified Party, and whether or not the relevant Claim has merit."

Breakdown of the indemnification clause

1. Parties involved:

• Indemnifying Party (the one covering the cost): This is the “Company” mentioned in the clause. They’re agreeing to take responsibility for certain problems if they happen.
• Indemnified Parties (the ones being protected): These include “[ABC]” and its connected businesses, officers, employees, and other related individuals. If a claim comes up, the Company agrees to protect all of these people from financial harm.

What it means: The Company is saying, “If anything bad happens that’s covered in this clause, we’ll take care of it for you.”

2. Scope of indemnification:

The clause says the Company must cover a wide range of problems, including:

• Breach of warranties or promises: If the Company makes a promise in the contract and breaks it.
• Breaking rules or legal duties: If the Company doesn’t follow part of the agreement or breaks the law.
• Third-party claims: If someone outside the contract sues or makes a claim because of something the Company did.
• Other issues defined in the contract: This is a flexible spot where the contract can name other specific risks or situations the Company agrees to cover.

What it means: This clause isn’t just about lawsuits—it includes lots of possible problems, from broken promises to outside complaints.

3. Types of costs covered:

The Company has to pay for a long list of expenses if something goes wrong, including:

• Lawsuit damages
• Legal settlements
• Court judgments
• Attorney fees
• Other out-of-pocket costs tied to the issue

What it means: If someone files a claim, the Company may have to pay for everything—from lawyers to settlements.

4. Third-party claims vs. internal issues

The clause can apply whether the issue comes from an outside person (a third party) or even from internal company problems, depending on how the contract is written.

What it means: It covers a wide range of situations, not just outside lawsuits.

5. Responsibility regardless of fault

Even if the party being protected (like ABC) is partly at fault, the clause still requires the Company to cover the costs.

What it means: This is a powerful clause; it says the Company takes on risk even if the person they’re protecting helped cause the issue.

Clauses like this are common in vendor agreements, SaaS contracts, and consulting deals. But they can vary a lot in scope and fairness—so it's important to review them carefully.

Platforms like DocJuris help teams quickly screen clauses like this one, highlight risky language, and suggest edits to keep the terms balanced and aligned with your company’s risk tolerance.

Drafting considerations and negotiation tips

Writing these clauses well can help avoid big problems later. Here are a few things to keep in mind:

Match the clause to the type of contract

Not every deal needs the same level of protection. A risky contract might need broader coverage, but something simple may not.

Watch out for “defend and hold harmless” language

If your contract says the other party has to “defend” you, it means they may have to pay for legal costs right away—even if the lawsuit turns out to be baseless. That can get expensive fast.

Align indemnification provisions with insurance coverage

Double-check that your insurance actually covers the risks you’re agreeing to in the clause. If not, you might get stuck paying out of pocket.

Use a contract playbook to stay consistent

If your company reviews lots of contracts, a playbook can help your team know what language is acceptable and what’s not. Tools like DocJuris can scan contracts automatically and flag anything outside your company’s policies and standards.

Manage indemnity risk effectively with DocJuris

Indemnification clauses are complex—and getting them wrong can be costly. That’s why DocJuris is designed not just to analyze contract language, but to simplify the entire review process from screening to redlining.

With DocJuris, teams gain visibility into how indemnity language changes across contracts, identify which terms slow down negotiations, and streamline collaboration between legal and business teams. Whether you’re reviewing vendor agreements, NDAs, or SaaS contracts, DocJuris helps you manage risk without slowing down the deal.

By giving users a clear, structured view of contract risks—plus the tools to fix them fast—DocJuris helps organizations confidently take control of indemnity obligations.

Want to reduce risk and accelerate negotiation?

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