Indemnification
A promise by one party to cover the other’s losses from specified events, most often third-party claims such as lawsuits over IP or injuries.
What it means
An indemnification clause shifts the cost of certain risks from one party to the other. The party giving the indemnity (the indemnitor) agrees to pay for losses, and usually legal defense costs, that the other party (the indemnitee) suffers from specific events. Those events are typically third-party claims, such as a lawsuit alleging that your work infringes someone’s copyright.
Say a freelance designer delivers a logo that turns out to copy an existing trademark, and the client gets sued. If the designer agreed to indemnify the client for IP claims, the designer may have to pay the client’s lawyers and any settlement.
Indemnities can be one-way or mutual, and their scope varies widely. Narrow ones cover only third-party claims caused by the indemnitor’s breach or negligence. Broad ones cover “any and all losses arising out of or relating to” the agreement, which can reach almost anything. Because indemnities are often carved out of liability caps, they are frequently the largest financial exposure in a contract.
What to watch for
- Check whether the indemnity is limited to third-party claims or also covers direct losses between the parties, which turns it into a second way to sue for breach.
- Look at the trigger words, because “arising out of or relating to” reaches much further than “caused by.”
- See whether the indemnity is carved out of the limitation of liability, which can leave you with uncapped exposure.
- Confirm there is a fair defense procedure: prompt notice, the indemnitor’s right to control the defense, and no settlement admitting fault without consent.
- If you give an indemnity, check whether your insurance actually covers contractual indemnity obligations.
Example clause
Contractor will defend, indemnify, and hold harmless Client from any third-party claim alleging that the Deliverables infringe that third party’s intellectual property rights, and will pay any damages and reasonable attorneys’ fees finally awarded or agreed in settlement. Client will give Contractor prompt written notice of the claim and reasonable cooperation in the defense.
If someone sues the client saying your work copied theirs, you handle the defense and pay the resulting costs.