Contracts are supposed to make things clear. Responsibilities, timelines, deliverables, payment terms. But the real world is messy, and business rarely unfolds without friction.
That is where indemnity clauses come into play. They do not prevent problems. They prepare for them. And if you are the one signing the agreement, you better know exactly what that clause is doing.
What Does an Indemnity Clause Actually Do
At its core, an indemnity clause is about risk. Specifically, it shifts the risk from one party to another.
If something goes wrong, who pays for the damage? Who defends the lawsuit? Who covers the cost of fixing the fallout?
An indemnity clause answers those questions in advance, long before the trouble starts.
Indemnify. Hold Harmless. Defend.
These are the three heavy hitters you will see in most indemnity provisions. And each one carries its own legal weight.
To indemnify means to compensate someone for loss or damage. If your actions cause harm and you agreed to indemnify the other party, then you are the one writing the check.
To hold harmless means you agree not to blame or pursue the other party for certain claims. It works like a shield, offering protection from liability.
To defend means you take responsibility for handling the legal process itself. If someone sues the other party over something you caused, you agree to step in and manage the defense.
Each of these words changes the scope of the clause. And sometimes, all three appear together in one sentence.
A Basic Example
Let’s say you run a construction company. You sign a contract with a property owner to remodel a building. The contract includes this clause:
“Contractor shall indemnify, defend, and hold harmless the Owner from and against any and all claims, damages, or losses arising out of or resulting from the Contractor’s performance of the Work.”
Simple enough. But now imagine one of your employees leaves a power tool running. It causes a fire. The property owner gets sued by the neighboring business.
Even though it was not the owner’s fault, your indemnity clause says they should not be on the hook. You agreed to cover damages. You also agreed to defend them. That means hiring the lawyer, managing the response, and paying the judgment if there is one.
Real Money Is on the Line
Indemnity clauses are not just legal decoration. They carry real financial consequences. In some cases, they are the difference between surviving a claim or going under.
And when lawsuits hit, they do not always target the right person. Plaintiffs cast wide nets. They name everyone remotely involved. A good indemnity clause makes sure that when your partner gets pulled into a lawsuit for something you did, they do not pay the price.
One Sided or Mutual
Some indemnity clauses only benefit one party. Others apply both ways.
A one sided indemnity clause usually protects the more powerful party in the contract. This is common in vendor agreements, subcontractor arrangements, and commercial leases. The smaller player agrees to take on the risk to get the deal done.
A mutual indemnity clause gives each side protection. It says, if I cause the harm, I will cover it. If you cause it, you cover it. That sounds fair. But it needs to be written clearly to avoid confusion when the dust settles.
Where You Will See Indemnity Clauses
They show up in more places than most people realize. Here are just a few common examples:
Service contracts where a provider agrees to protect the client from claims related to negligence, breach, or misconduct.
Construction agreements where contractors agree to indemnify owners and developers for worksite injuries or code violations.
Technology deals where software developers promise to indemnify clients for claims related to intellectual property infringement.
Leases where tenants agree to protect landlords from liability tied to tenant activity on the property.
The language may look different in each, but the function stays the same. It is about risk transfer.
Watch the Scope
Not all indemnity clauses are created equal. Some are narrowly tailored. Others are broad enough to cover every possible legal theory under the sun.
You may see phrases like:
Arising out of
In connection with
Relating to
Based upon
These seem harmless, but they can drastically expand what you are liable for. An incident only loosely connected to your performance could trigger your obligation to indemnify.
One wrong word, and you have agreed to pay for things you had no hand in causing.
Negligence and Indemnity
This is where the conversation gets serious.
Many indemnity clauses ask you to cover the other party’s legal costs even if they were partially at fault. Courts treat this very differently depending on the state you are in.
Some states allow it. Others strictly limit it. And a few refuse to enforce indemnity for sole negligence altogether.
Do not assume your contract protects you just because the words sound balanced. You need to understand how your state’s law interprets those words.
Sample Clause — Vendor Agreement
Here is an example of a clause pulled from a standard vendor contract:
“Vendor agrees to indemnify, defend, and hold harmless Client and its affiliates from any and all claims, demands, liabilities, damages, or expenses, including attorney’s fees, arising from Vendor’s acts or omissions in connection with the performance of this Agreement.”
This puts the entire burden on the vendor. If anything goes wrong that is connected to their services, they are responsible.
It also includes attorney’s fees. That matters. Without that language, the defending party may be left to pay legal fees even if they win.
Sample Clause — Technology Licensing
Now take a look at this one, from a tech licensing deal:
“Licensor shall indemnify Licensee against any claims alleging that the Licensed Product infringes upon any third party intellectual property rights, provided that Licensee promptly notifies Licensor of such claim and cooperates in the defense.”
Here, the clause is specific. It only applies to IP claims. It also requires cooperation and notice. These details create boundaries and prevent abuse of the indemnity obligation.
How to Negotiate These Clauses
The most common mistake people make is accepting the clause as boilerplate. It is never just boilerplate.
Ask yourself:
What kinds of claims does this cover
Is it tied to my actual conduct, or is it broader than that
Do I have insurance that will respond to this type of indemnity
Am I agreeing to cover attorney’s fees
Does the other side have the same obligation
Push back on anything that is vague or overreaching. Do not be afraid to ask for mutual indemnity or to limit the clause to your own negligence only. The worst that happens is they say no. But you should never let someone else write your liability for you.
Insurance and Indemnity
Insurance plays a huge role in indemnity clauses. Many commercial policies are written specifically to respond to indemnity obligations.
But not all policies will. If you agree to indemnify someone for their own negligence, your carrier may not cover that. You might be left paying those costs out of pocket.
Before you sign, check with your broker. Make sure your insurance actually supports the promises you are making in the contract.
When the Clause Gets Triggered
Once a claim arises, things move fast. You may receive a tender of defense. That is a formal letter asking you to honor your indemnity obligations.
Do not ignore it. Ignoring a tender can be used against you later. If you believe the claim is outside the scope of the clause, say so clearly and promptly. But be prepared to defend that decision.
If the clause is valid and the claim fits, you step in. You hire the lawyer. You manage the defense. You pay the settlement or the judgment. That is what you agreed to do.
It All Comes Down to Clarity
At the end of the day, the strength of an indemnity clause comes from how clearly it is written. If the language is vague, it opens the door to costly litigation about who owes what and when.
If it is drafted well, it sets expectations and prevents finger pointing when problems hit. That is why we draft them carefully and negotiate them like they matter.
Because when the lawsuit arrives, the clause is the first thing everyone reads.