Indemnity clause: meaning, risks, and what to negotiate

No — they are related but distinct. Liability is the general legal obligation to compensate another party for loss caused by your breach or wrongdoing, subject to the usual rules on causation, remoteness, and mitigation. Indemnity is a specific contractual mechanism defining the circumstances in which one party must make good the other's losses — often going further than ordinary liability by covering costs a court might not award, bypassing remoteness rules, and operating regardless of fault. Think of liability as the general framework and indemnity as a targeted, contractually agreed extension of it.

Yes — and this is one of the most consequential interactions in any commercial contract. Many agreements expressly carve indemnity obligations out of the overall liability cap, meaning the indemnifying party's exposure under the indemnity is potentially unlimited even where the rest of the contract contains a tight financial ceiling. Always read the indemnity clause and the limitation of liability clause together. If the indemnity is carved out of the cap, negotiate a separate sub-cap on indemnity exposure.

'Indemnify' means compensating for losses after they are established. 'Defend' means actively funding and managing the legal defence of claims in real time — before any loss is established — from the moment a claim is filed. 'Hold harmless' means absorbing the loss entirely without seeking any contribution from the indemnified party. The 'defend' obligation is the most operationally significant: it means you may need to instruct and fund lawyers on behalf of another business from day one of a dispute, regardless of whether the claim ultimately succeeds.

A mutual indemnity runs both ways — each party indemnifies the other in the same circumstances, such as losses arising from their own breach or negligence. A one-sided indemnity runs in one direction only. One-sided indemnities are not inherently unfair if the risk profile genuinely justifies them — for example, where one party's activities create significantly greater risk of harm. The question to ask is whether the asymmetry reflects the genuine commercial risk allocation, or whether it is simply the result of one side having more drafting leverage.

Not always, and this is a common and costly mistake. Professional indemnity and public liability policies cover claims arising from your negligence, but many policies expressly limit or exclude 'contractually assumed liability' — obligations you have taken on by contract that go further than your liability at law. Before accepting significant indemnity obligations, review your policy wording with your broker, confirm the specific obligations are covered, and check that your policy limits are adequate for the worst-case scenario.

If the indemnity contains a notice condition — rather than just a notice covenant — late notice can extinguish your right to indemnification entirely, or reduce the amount you can recover. The rationale is that the indemnifier needs timely notice to exercise defence rights and mitigate the loss. If you are the indemnified party, treat any incoming third-party claim as time-critical and notify immediately. If you are the indemnifier, push for notice as a strict condition of the indemnity obligation rather than a general duty.

An IP indemnity is a promise by the supplier that if a third party claims their product or service infringes that party's intellectual property rights — patents, copyright, trademarks, or trade secrets — the supplier will cover the customer's legal defence costs, any damages awarded, and the cost of procuring a non-infringing replacement or licence. It matters because IP infringement claims can be extremely expensive and are entirely outside the customer's control. The IP indemnity transfers that risk to the vendor, who created the product and is best placed to assess and manage the infringement risk.

Yes — in B2B contracts, indemnity provisions are almost always negotiable. The most commonly negotiated elements are the scope of triggering events, mutuality, interaction with the liability cap, defence and settlement control rights, contributory negligence carve-outs, and notice requirements. In high-volume standard contracts such as off-the-shelf SaaS, the vendor may refuse to negotiate. In mid-market and enterprise agreements, indemnity is typically one of the most actively negotiated provisions in the entire contract.