The Indemnification Clause in Commercial Contracts

Key takeaways:

• Define indemnification scope narrowly by limiting coverage to claims directly caused by your actions or negligence and avoiding overly broad language like “any and all claims” that creates unlimited liability exposure.

• Negotiate specific liability caps and time limits into indemnification clauses to prevent unlimited financial exposure, with three to five years being a common duration for indemnification obligations.

• Choose between one-sided and mutual indemnification structures based on your negotiating leverage and risk tolerance, recognizing that mutual clauses distribute risk more evenly by requiring both parties to indemnify each other.

• Implement contract management systems with standardized indemnification templates to ensure consistent protection across all agreements while maintaining necessary flexibility for specific business relationships.

How confident are you in the contracts protecting your business right now? Maybe you feel pretty good about the big deals, but what about those smaller agreements that could still create major headaches if something goes wrong?

An indemnification clause is a contractual provision where one party agrees to compensate another for specific losses or damages. This clause transfers financial risk between parties and provides legal protection when things go wrong.

These clauses are essential in commercial contracts because they make it clear who is responsible for what when something goes wrong. They establish clear responsibility for costs, legal fees, and damages before problems arise.

In this article, we’ll cover the following:

• What an indemnification clause is
• Common terms used in an indemnification clause
• The benefits of an indemnification clause
• Examples of indemnification clauses

What is an indemnification clause?

Let’s dig deeper into how these clauses actually work. An indemnification clause creates a legal obligation between two parties where the indemnifying party agrees to compensate the indemnified party for specific losses or damages.

Here’s how it works in practice. The indemnifying party takes financial responsibility when covered events occur. They must pay for damages, legal fees, and other costs outlined in the agreement. This transfers risk from one party to another before problems arise.

To see this in action, suppose a contract between a software development company and a client includes an indemnification clause. The software development company may be required to compensate the client if the software they deliver causes harm or damage to the client’s business. The indemnification clause would outline the conditions and circumstances under which the indemnifying party would be responsible for compensating the indemnified party.

Indemnification clause examples and sample language

Okay, so you understand what these clauses do in theory. But what do they actually look like in practice? The exact language makes all the difference, and while it can get complex fast, here’s a general indemnification clause to give you a starting point:

Example clause: “Party A agrees to indemnify, defend, and hold harmless Party B, its officers, directors, and employees from and against any and all claims, liabilities, damages, and expenses, including reasonable attorneys’ fees, arising out of or in connection with any act or omission of Party A in the performance of its obligations under this Agreement.”

This is a pretty standard one-sided clause where Party A takes on all the risk. Notice how it covers not just Party B, but also their officers, directors, and employees. That’s typical—you want to cast a wide net for protection. The ‘defend and hold harmless’ language is also key—it means Party A doesn’t just pay damages after the fact but also covers legal defense costs as they arise. However, it’s crucial that this is stated in writing, as courts often exclude the recoverability of legal fees unless the agreement specifically provides for it.

Later in this article, we’ll look at how this changes when both parties share the risk in a mutual indemnification clause. But first, let’s break down the key terms you’ll see in these clauses.

Standard terms used in indemnification clauses

Understanding these terms helps you draft stronger indemnification clauses. Each contract requires customization based on your specific risks and business relationship.

• Indemnification event: Defines the circumstances or events that trigger the indemnification obligation.
• Indemnifying party: Refers to the party responsible for compensating the indemnified party.
• Indemnified party: Refers to the party receiving compensation from the indemnifying party.
• Amount of indemnification: Specifies the maximum compensation provided by the indemnifying party.
• Time limit for indemnification: Sets a deadline for the indemnifying party to fulfill its obligation. This obligation is often limited by time, with three to five years being a common duration.
• Scope of indemnification: Defines the types of losses or damages covered under the obligation.
• Exclusions: Outlines exceptions to the indemnification obligation.
• Subrogation: Specifies the extent to which the indemnifying party may pursue third parties for reimbursement.

The benefits of an indemnification clause

Indemnification clauses provide five key benefits that protect your business interests and reduce financial exposure.

Risk transfer

Indemnification clauses transfer the risk of loss from one party to another, which reduces the risk to the indemnified party. This risk transfer is beneficial when one party is taking on greater risk, especially since poor contract management can be costly; according to The 2025 Contracting Benchmark Report, organizations lose an average of 8.6% of their total spending per year to cost leakage in contracts. For instance, if a landlord rents space to a fitness instructor who conducts classes there, the landlord may require an indemnification clause that protects them if someone gets injured during a workout. This shifts the liability away from the property owner and onto the party who’s actually providing the service that creates the risk. The indemnified party can feel more secure knowing that the risk of loss has been transferred to the other party.

Protection

The indemnification clause protects the indemnified party in the event of losses or damages. This protection can include compensation for expenses incurred and loss of profits. This protection can be essential in situations where one party relies on the other to fulfill certain obligations, such as a supplier providing materials to a manufacturer.

Clarity

Clearly outlining the responsibilities of each party in the event of a loss or damage reduces the possibility of misunderstandings or disputes.

Peace of mind

An indemnification clause can provide peace of mind to the parties involved in the contract. It allows them to focus on other aspects of their business relationship by reducing stress and anxiety.

Liability limitation

Indemnification clauses can limit a party’s liability, reducing their financial exposure if a loss or damage occurs.

One-sided vs. mutual indemnity clauses

Indemnification clauses come in two main structures. One-sided clauses require only one party to provide protection. Mutual clauses require both parties to indemnify each other for different types of losses.

The choice between structures depends on your negotiating power and risk tolerance.

A mutual indemnification clause is a provision in which both parties agree to indemnify each other. If either party suffers a loss, the other party will compensate them. Construction contracts often use mutual indemnification clauses because both the owner and the contractor want to protect themselves from financial losses in case of any damage or injury during the construction process.

On the other hand, a one-sided indemnification clause is a provision in which only one party agrees to indemnify the other. Only one party is responsible for compensating the other in the event of a loss. This clause is often used when one party is at a greater risk of loss and wants to protect itself. For example, a manufacturer may include a one-sided indemnification clause in a contract with a distributor to protect itself from any losses resulting from the distributor’s actions.

Example of a one-sided indemnification clause

The seller agrees to indemnify and hold harmless the buyer, its affiliates, and their respective officers, directors, employees, agents, successors, and assigns (collectively, the “Indemnified Parties”) from and against any and all losses, damages, liabilities, deficiencies, claims, actions, judgments, settlements, interest, awards, penalties, fines, costs, or expenses of whatever kind, including reasonable attorneys’ fees, fees, and the costs of enforcing any right to indemnification under this agreement, and the cost of pursuing any insurance providers, incurred by the Indemnified Parties in connection with any claim arising out of or resulting from (i) any material breach of this Agreement by Seller or its affiliates, or (ii) the accuracy of the representation, warranty or covenants made by the seller in this agreement.

Example of a mutual indemnification clause

Each party (the “Indemnifying Party”) shall indemnify, defend and hold harmless the other party (the “Indemnified Party”), its affiliates, and its respective officers, directors, employees, agents, and representatives from and against any and all claims, damages, losses, liabilities, judgments, settlements, costs, and expenses (including reasonable attorney’s fees) arising from or in connection with any breach of this agreement by the Indemnifying Party or its representatives, except to the extent that such claims, damages, losses, liabilities, judgments, settlements, costs and expenses are caused by the negligence or intentional misconduct of the Indemnified Party. The Indemnified Party shall promptly notify the Indemnifying Party of any such claim and reasonably cooperate with the Indemnifying Party in defense of such claims at the Indemnifying Party’s expense.

Indemnification clauses in purchasing contracts

Indemnification clauses in purchasing contracts protect buyers and sellers from specific financial losses. These provisions shift risk between parties based on who can better control or absorb potential damages.

Buyers typically seek protection against product defects, compliance violations, or third-party claims. Sellers want coverage for misuse of their products or breach of payment terms.

For buyers, indemnification clauses can protect against damages resulting from defects in the goods or services purchased. For example, if a cosmetics company purchases an alpha hydroxy acid ingredient for their skin cream and later discovers it has a higher acid content than represented, this creates real liability exposure. Customers could suffer skin burns, leading to lawsuits and product recalls. Here, the indemnification clause would require the supplier to compensate the cosmetics company for any losses—including legal fees, settlements, and lost sales—resulting from the supplier’s misrepresentation of the ingredient’s acid content.

For sellers, indemnification clauses can protect against claims made by the buyer for breach of contract or other damages. If a buyer alleges that the seller failed to deliver goods per the agreed-upon terms, the indemnification clause may require the buyer to compensate the seller for any losses incurred due to the buyer’s claims.

Risks and limitations of indemnification clauses

Look, indemnification clauses aren’t all upside. If you’re not careful—especially if you’re the one agreeing to indemnify the other party—you could be on the hook for way more than you bargained for.

Here’s what to watch out for:

• Overly broad language: When a clause says you’ll cover “any and all claims,” that’s a huge red flag. You want to limit the scope to claims that are directly caused by your actions or negligence, not things that are out of your control.

• Uncapped liability: A good indemnification clause should have limits. Without a cap, you’re facing unlimited financial risk. This is a key negotiation point—don’t skip over it.

• Cost of defense: Many clauses require you to cover the other party’s legal fees. This can get expensive, fast. Sometimes you can negotiate to control the defense yourself, which gives you more say over the costs.

• Indemnification for your own negligence: Watch out for clauses that try to make you indemnify the other party even when they’re at fault. These “broad form” indemnifications are typically held unenforceable for public policy reasons, but you don’t want to find out the hard way.

The reality is, if the language is too one-sided or unclear, a court might not enforce it, especially since ambiguity is most commonly resolved in the indemnifying party’s favor. So it’s in everyone’s best interest to make these clauses fair and specific. Nobody wants to end up in litigation over a poorly written indemnification clause.

Managing indemnification clauses at scale

Now, understanding one indemnification clause is manageable. But what happens when you’re dealing with hundreds or thousands of contracts, each with its own variation of this clause? Trying to track all these obligations manually is a recipe for disaster, especially since research shows more than half of legal teams still aren’t using a single, dedicated platform to manage contracts. You can’t possibly remember which contracts have mutual vs. one-sided clauses, or which ones have a liability cap.

This is where having the right systems really pays off. When you have a centralized contract repository, you can stop digging through folders and actually use your contract information strategically. The trend is moving this way, as The State of AI in Legal 2025 Report found that in-house trust in using AI for contract analytics is up 17% year-over-year, reflecting its growing importance for deriving business value. Here’s what becomes possible:

• Quick searches across all contracts: Need to find every contract with uncapped indemnification? A good contract lifecycle management (CLM) platform lets you search the full text of your agreements and pull up what you need in seconds.

• Standardized language: You can build approved indemnification clauses into your templates. This ensures your team starts from a strong, consistent position in every negotiation; in fact, 91% of in-house counsel report that such resources give them a better starting point for drafting.

• Track obligations proactively: When a claim does come up, you know exactly what your obligations are because they’re tracked in the system. No more last-minute scrambles to figure out what you agreed to.

• Spot patterns and risks: You can analyze which types of indemnification clauses cause the most issues, which counterparties push for the broadest language, and where you might be overexposed.

Well-crafted indemnification clauses reduce financial risk and make it clear who pays for what when something goes wrong. The key is customizing terms to match your specific business needs and risk tolerance.

Modern contract management platforms help you standardize indemnification language across all agreements while maintaining necessary customizations. This ensures you’re consistently protected without slowing down how quickly you can get deals signed. Request a demo today to see how automated contract workflows can improve your indemnification clause management.

Frequently asked questions about indemnification clauses

Do indemnification clauses hold up in court?

Generally, yes—courts tend to enforce indemnification clauses as long as they’re clearly written and not overly broad or unconscionable. However, if a clause is ambiguous or tries to indemnify a party for their own gross negligence or willful misconduct, a court might limit it or throw it out entirely. The enforceability really comes down to the specific wording and the laws of your state. Some states have specific statutes limiting certain types of indemnification, especially in construction contracts.

Who does an indemnification clause protect?

It protects the indemnified party from financial losses caused by the actions (or inactions) of the indemnifying party. Think of it as a promise from one side to cover the other’s back if something goes wrong because of what they did or failed to do. In a mutual indemnification clause, both parties agree to protect each other for their respective actions. The key is that each party is responsible for the consequences of their own conduct.

What are the risks of an indemnity clause?

The biggest risk is taking on more liability than you realize. If you’re the indemnifying party and the clause is too broad, you could be responsible for losses that aren’t really your fault. You might end up paying for the other party’s legal defense even in frivolous lawsuits. There’s also the risk of uncapped liability—without limits, one bad situation could bankrupt your business. Plus, if the clause is poorly written, you might think you’re protected when you’re actually not, leading to nasty surprises when something goes wrong.

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Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.