Indemnity Contract Clause: What SMEs Should Know

When a consumer feels he has been harmed by a company, they often sue. And because companies want to protect themselves, they buy liability and/or errors and omissions insurance. In some cases, companies also bond their workers – usually those who are sent out to work (lawn care, home repair, etc.). In short, all of the above are examples of indemnity – the center subject of this post.

What is Indemnity?

The short indemnity definition is this:

Indemnity is protection against some type of financial or other loss.

It may protect individuals, companies, and even users of a product or service. Insurance is arguably the most common form of indemnity, most are familiar with it.

Also, legal contracts will often have an indemnification clause. It is not insurance per se. Instead, one party agrees to indemnify (or protect) another party if certain types of harm should come about because of their relationship.

For example, a school district hires a construction firm to build a new school. A contract is drawn up. A date is set for the school to be finished. In the contract, the construction company agrees to indemnify the school district by paying a specific daily fine for every day it goes beyond the due date.

Why You Should Add an Indemnity Clause to a Contract

In short, if you have a clear indemnity clause, you will avoid expensive litigation and you have a better chance of recovering losses or protecting yourself (and your biz) from liability.

Adding an indemnity clause to a contract makes sense in several cases:

  • You have deadlines that must be met, and the other party must meet them or incur damages.
  • A service you are providing that could cause damage to property and be a safety concern. You want to be protected against damages
  • You have a web-based business and need a “terms and conditions” agreement that protects you from negative consequences as a result of a customer’s purchases or use.

Types of Indemnity Clauses

Now there are several ways to formulate your “protection” legal lingo. If you are signing or creating a contract, pay attention to the next common types of indemnity clauses.

1. Bare Indemnities

One party (A) agrees to hold another party (B) harmless for any negative results related to a specific situation or a circumstance. So, a vendor wants to sell ice cream at a ball game. He and the stadium enter into a contract. The vendor indemnifies the stadium for anything bad that might happen to him while in the stadium selling his ice cream.

2. Reverse or Reflexive Indemnities

Party A agrees to indemnify Party B no matter what Party B may do (negligence, omissions, etc.). This is not very common, because it is too broad. Can you imagine that the school district not having an indemnity clause if the construction is not completed in time for the new school year? Nope.

3. Proportionate (Limited) Indemnities

These set certain limitations on what Party A will indemnify Party B for. So, If Party B acts negligently, for example, then Party A does have the right of recourse. A simple example would be if Party B, a construction contractor, deliberately uses bad materials when building a house. On the other hand, if the construction contractor is late with completion, he suffers no consequences.

4. Third-Party Indemnities

Party A indemnifies Party B from liability in the event a third-party comes after Party A for a negative consequence. So, a hospital contracts with a bed manufacturer to produce and deliver 200 beds. The manufacturer will want a clause in that contract that protects himself from liability if a patient sues the hospital for an injury resulting from the bed.

5. Financing Indemnities

Party A agrees to indemnify Party B for losses incurred by the failure of Party C to fulfill its terms of an agreement. Your property management company (Party B) has agreed to make all of the arrangements for a new tenant moving in a month. You and the property owner (Party A) enter into a contract for this.

As a property manager, you provide many services – one of them is pool cleaning. The cleaning company you’ve partnered with for this fails to come and clean that pool on time. The property owner cannot sue your business for this for any losses incurred due to this.

6. Party-to-Party Indemnities

This is also known as double indemnity. Both parties to a contract agree to indemnify each other for losses or consequences which either party may incur. This might happen in a partnership agreement when one of the partners loses a huge client for some reason. The other partner cannot collect damages for this.

How to Limit the Scope of Indemnity

As a freelancer or business owner, you can do several things to limit the scope of indemnity.

Have no Indemnification Clause at All. At first glance, this might seem great. On the other hand, in a court case, a judge may decide that there was implied liability in regard to the work that you have done. Then you are responsible for the total cost of damages, attorney’s fees, etc.

Get the Other Party to Assume your Liability. This is similar to having no indemnification clause at all so that you have no liability. The exception to this clause will be if you do something illegal related to the terms of the contract.

Put a Cap on Your Financial Liability. Insurance companies do this when they draw up policies for their customers. You can do the same if it makes sense.


Indemnification is complex. Before you insert an indemnification clause into a contract or agree to sign one that has such a clause, get thee to an attorney. A legal professional will be able to better walk you through all the nuts and bolts of this issue.

Photo by Cytonn Photography

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