"We'll indemnify you" sounds like reassurance. It's actually one of the most powerful — and most one-sided — promises in a commercial contract. An indemnity can require a party to reimburse losses that an ordinary breach-of-contract claim would never reach, without the usual hurdles of proving loss, causation, or remoteness. Which is exactly why the party being asked to give one should read it very carefully.
Here's what an indemnity clause does, how it differs from ordinary damages, illustrative wording, and the points that decide how dangerous it is.
What an indemnity actually does
An indemnity is a promise by one party (the indemnifier) to compensate another (the indemnified) for specified losses or liabilities. It's a primary obligation to make good a defined category of loss — commonly losses arising from third-party claims, IP infringement, data breaches, or breach of specific warranties.
The reason it matters so much is what it bypasses. In an ordinary claim for breach of contract, the claimant has to prove the breach caused the loss, that the loss isn't too remote, and must generally mitigate. A well-drafted indemnity can sweep several of those hurdles aside, turning "prove your damages the hard way" into "pay this defined amount because you promised to."
Indemnity vs ordinary damages
The gap between the two is the whole point of asking for an indemnity.
| Ordinary damages | Indemnity | |
|---|---|---|
| Trigger | Breach of the contract | The specified event (which may not be a breach at all) |
| Causation / remoteness | Must be proven; remote losses excluded | Often covered on the clause's own terms |
| Duty to mitigate | Applies | May be reduced or excluded (depending on drafting) |
| Amount | What the court assesses | Defined by the clause — potentially broader |
That's why a party giving an indemnity is accepting a materially heavier obligation than ordinary contractual liability — and why the party receiving one should be clear about exactly what it covers.
Illustrative wording
Illustrative only, to show the shape:
"The Supplier shall indemnify the Customer against all losses, liabilities, costs and expenses (including reasonable legal fees) suffered or incurred by the Customer arising out of any third-party claim that the Services infringe that third party's intellectual property rights."
Every phrase is negotiable: "all losses" versus a capped amount, "arising out of" versus a narrower "directly caused by," and whether it's subject to the contract's overall liability cap.
What to watch before giving or accepting one
- Scope of covered losses. "All losses, including indirect and consequential" is far broader than "direct losses." An uncapped indemnity for indirect loss is where real exposure hides.
- Does the liability cap apply? Indemnities are frequently carved out of the limitation-of-liability clause, making them uncapped. Whether they sit inside or outside the liability cap can be the single biggest number in the contract.
- Trigger precision. Is it triggered by an actual breach, or by any occurrence of the event (even without fault)? Fault-independent indemnities are much heavier.
- Conduct-of-claims. For third-party-claim indemnities, who controls the defence and settlement? An indemnifier paying the bill usually wants to run the claim.
- Mitigation and contribution. Silence can leave an indemnifier paying for losses the indemnified party could have reduced, or losses partly its own fault.
Field note: The most expensive drafting mistake I see is an indemnity that's excluded from the liability cap without anyone deciding that deliberately. A supplier with a £50k contract and a £50k cap can find its data-breach indemnity is unlimited — because the cap says "except for indemnities." That carve-out should be a conscious risk decision, not boilerplate.
Where AI contract tools help
Indemnities are easy to miss and dense to parse, so AI contract review earns its place surfacing them: extracting who indemnifies whom, for what, and — critically — whether the indemnity is inside or outside the liability cap. That flag alone justifies the tool on a first pass.
What AI can't do is decide whether the indemnity's allocation of risk is acceptable for your client's commercial position — that's judgement on the facts. Treat the tool's output as a lead to verify against the actual wording, not a conclusion.
FAQ
What is an indemnity clause? A promise by one party to compensate another for specified losses or liabilities — a primary obligation to make good a defined category of loss, often bypassing some of the hurdles of an ordinary damages claim.
What's the difference between an indemnity and damages? Damages compensate for loss caused by a breach, subject to proof of causation, remoteness, and mitigation. An indemnity can cover defined losses on its own terms, sometimes without those hurdles, and may be triggered by events that aren't breaches at all.
Are indemnities capped? Not automatically. They're frequently carved out of the contract's limitation-of-liability cap, which can make them uncapped. Whether an indemnity sits inside or outside the cap is a key negotiation point.
What does "indemnify and hold harmless" mean? It's a common formulation of the same promise — to compensate for losses and to protect the other party from being held liable for them. In English-law drafting the "hold harmless" wording adds little beyond "indemnify," but it's conventional.
Should I accept an uncapped indemnity? Only as a deliberate, risk-assessed decision. An uncapped indemnity — especially one covering indirect loss — can dwarf the contract's value, so it should never be accepted as unread boilerplate.
LegalAI Space's review agents flag indemnities and their interaction with the liability cap against your firm's playbook — every finding traceable to the source clause. Book a 30-minute call with Daman.
Related reading
- Limitation of liability clause: example and the legal limits — the cap indemnities are so often carved out of.
- Confidentiality clause: what it covers and common traps — another clause where the carve-outs decide everything.
- AI contract review: how it works, and how to trust it — surfacing risk clauses like this on a first pass.