The indemnity clause: the line that can sink you
Corporate & Commercial18 February 20256 min read
Most people signing a commercial contract skim the middle and focus on price and term. Yet buried in that middle is often a single clause that can matter more than either: the indemnity. It rarely looks dangerous. It reads as dry, procedural boilerplate. But an indemnity is a promise to carry someone else’s loss, and a poorly drafted one can hand the other side a claim far larger than anything you were ever paid under the deal. This briefing explains, in plain terms, what an indemnity does and how to read one before it reads you.
What an indemnity actually is
An indemnity is a promise to compensate another party for defined losses, often on a dollar-for-dollar basis, and often without the usual limits the law places on ordinary damages. That is the crucial difference. If you simply breach a contract, the other side generally has to prove its loss, show the loss was foreseeable, and take reasonable steps to reduce it. A broad indemnity can strip those protections away, so you pay the full amount the moment the triggering event occurs. The clause changes not just how much you might owe, but how easily the other side can come after you for it.
Where the danger hides
The risk lives in the width of the wording. Watch for indemnities that cover “any and all” losses “howsoever arising”, that extend to consequential or indirect loss, or that make you responsible even for events partly caused by the other party’s own conduct. Equally telling is what is missing: no cap on the amount, no time limit, and no requirement that the loss actually flowed from your breach. A clause with no ceiling and no filter is a clause that can outlast and outsize the deal itself.
The questions to ask before you sign
Read every indemnity against four questions. What exactly triggers it? How far do the losses reach, direct only, or consequential too? Is there a cap, and a time limit? And is my exposure proportionate to what I am earning from this contract? If the answers make you uneasy, the clause is negotiable like any other: you can narrow the trigger, exclude indirect loss, add a monetary cap tied to the contract value, and carve out losses caused by the other side. This is precisely the kind of provision where early legal review pays for itself.
Insurance is not a substitute for reading it
It is tempting to assume your insurer will absorb whatever an indemnity throws at you. Often it will not. Liability you take on by contract, an obligation you would not have had at general law, can fall outside standard policy cover, leaving you exposed personally or as a business for the very risk you thought you had transferred. Before relying on insurance to backstop an indemnity, confirm the policy actually responds to contractual liability of that kind.
The bottom line
An indemnity is not something to fear reflexively, it is a normal and often fair way to allocate risk between commercial parties. The danger is signing one you have not read, or not understood. Treat every indemnity as a clause that could be called on, price your risk accordingly, and negotiate the wording so it matches the deal rather than dwarfing it. If a dispute does arise, the same discipline applies as with any other, move calmly and preserve the record. This article is general information only and is not legal advice; indemnity law varies by jurisdiction, so have a lawyer review the specific clause before you commit.