What is Indemnity (and what does Indemnities mean in 2023)?

An Indemnities Flowchart, showing how the Indemnities process works and what happens where recourse is had to a Indemnity


Indemnity clauses can be confusing and overwhelming, and there’s at least one in every contract. 

The natural temptation is to skim past clauses containing indemnities and hope they won’t bite you down the track, or that the other contracting party won’t have recourse to an indemnity in their favour.

But indemnity provisions play a crucial role in determining the risk allocation of commercial contracts and can have significant consequences for both parties involved. That’s why it’s essential for anyone working with contracts, or thinking about entering into a contract, to properly understand these clauses, even when they also intend to seek legal advice.

The more you know about those dreaded provisions, the better!

What are indemnities

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Indemnities are provisions in contracts where one party (usually the Contractor) promises to pay money to the other party (the Principal) if a specified event occurs. The Contractor may also agree to hold the Principal harmless by taking full responsibility for the event. Examples of events which trigger an indemnity include a breach of contract, personal injury or death, loss or damage to property and breach of intellectual property rights of third parties. Indemnities may contain exclusion clauses – commonly if the Principal contributes to the loss or damage it suffers – and may be limited by other provisions in the contract.

Indemnities can be used in various situations, including in contracts, leases and insurance policies.

They are usually seen as a risk protection mechanism for the indemnified party, and should be reviewed in minute detail by both parties before signing the contract.

Why indemnity clauses are important

Contracts are needed to mitigate risk in any transaction, project or arrangement. And almost every contract includes an indemnity clause.

Indemnity clauses help to safeguard the party being indemnified from potential liabilities and legal disputes over the term of the contract.

They also help the indemnified party sidestep the costs of another’s mistakes or negligence by providing protection from potential costs, losses, expenses or damages.

Image of a set of scales showing Low Risk vs High Risk, with the title, "Indemnity Basics" and a red lego block on the high risk scales with the words, "Indemnity to mitigate risk"

Component parts of an indemnity

Lawyers who are drafting indemnity provisions in commercial contracts need to include each of the component parts of an indemnity clause to ensure that their organisation is protected and that its rights are safeguarded.

Here are the key components to include or consider in an indemnity provision:

  1. Who is being indemnified? This is the party receiving protection under the indemnity clause (usually referred to as the “Indemnitee”). You need to know which contracting party is entitled to the indemnity in order to identify the extent of protection offered by the clause.

  2. Who is providing the indemnity? This is the party that agrees to provide the indemnity (the “Indemnitor”).

  3. In which circumstances will the party be indemnified? The indemnity clause should specify the specific circumstances in which the indemnified party will be protected. This could be events such as breaches of contract, negligence, or any other agreed-upon events.

  4. What will the party be indemnified for? The indemnity clause should specify the type of losses that the indemnified party will be protected against, such as costs, loss, expenses, damages, or liabilities.

  5. What exclusions are there? Indemnity clauses may have exclusions, which specify situations where the party will not be protected. An example is where the indemnifying party is not liable to indemnify for a breach of contract but must indemnify for its negligence. It is important to understand these exclusions in order to know when the indemnity will not be available.

  6. Will there be any reduction of the indemnity? The indemnity may be reduced if the indemnified party caused part of the loss. This reduction should be specified in the indemnity clause.

  7. Is there a limitation of liability clause in another part of the contract that limits the indemnity? The indemnity may be limited by another part of the contract, such as a limitation of liability clause. It is important to read these clauses together to understand the extent of protection offered by the indemnity clause.

To understand these component parts – and make sure that your organisation is protected and your rights are safeguarded – take the time to carefully review the indemnity clause in any contract and identify its component parts.

This will help you to ensure you have a clear understanding of the protection offered and the extent of the indemnity.

Set of dice spelling out the word, "Indemnity" on a blue background.

Examples of how an indemnity works in practice

Indemnity clauses may have a number of different purposes:

Example 1

The Contractor is negligent in constructing a retaining wall and it collapses and injures John Smith, a passerby. If John Smith sues the Principal (ie the owner of the site), the Contractor will have to indemnify the Principal against costs claimed by John Smith for all his medical costs, lost wages due to time missed from work, etc.

Example 2:

The Contractor fails to properly secure a construction site, and a beam falls onto the neighbour’s house. The Contractor must pay for all costs incurred by the Principal (if the neighbour sues the Principal) to repair the house, including any legal fees between the parties to resolve the matter.

Example 3:

The Contractor provides consultancy services to a Client. The Contractor makes a mistake which costs the Client a significant amount of money. The Contractor must reimburse the Client for that amount.

Ways a party is commonly indemnified

Below are some of the common ways a party can be indemnified by the other party under an indemnity clause in a contractual agreement:

  • Injury to a person and death

  • Property damage

  • Breach of contract

  • Third-party claims (sometimes called “third party indemnities”)

  • Loss or damage suffered as a result of a party’s negligence

  • Intellectual property infringement

  • Environmental liabilities

  • Costs and expenses incurred in connection with the enforcement of the indemnity clause

  • Indemnification for legal fees and court costs

  • Indemnification for damages or costs resulting from a breach of confidentiality or non-competition agreements.

The wording of the particular indemnity clause (or the types of indemnity clauses) will help you determine the specific circumstances in which the party will be indemnified, as well as the extent of the indemnification.

Common exclusions in an indemnity clause:

The exclusions and reductions in an indemnity clause can significantly impact the protection provided by the indemnity.

Common exclusions include:

  • Circumstances beyond the control of the party providing the indemnity (e.g. acts of God, war, or natural disasters)

  • Intentional or negligent acts by the party being indemnified

  • Losses or damages that were not foreseeable at the time of contract formation

  • Limitations or exclusions imposed by law.

  • Consequential loss.

Reduction in the quantum of an indemnity

If the party being indemnified contributes to the loss or damages in question, the indemnity may be reduced to reflect the extent of the party’s contribution.

Limitation of liability clause

A limitation of liability clause may impact the amounts payable under the indemnity clause, potentially reducing the amount of damages or costs that can be recovered if your organisation is being indemnified.

For example, a limitation of liability clause may limit the amount of damages recoverable under the contract (including under an indemnity) to a specific dollar amount or a percentage of the contract sum.

If the terms of the limitation of liability clause – when read with the indemnity provisions – are not acceptable, it may be necessary to negotiate changes to the clause or consider other risk mitigation measures.

Hidden indemnities

It is common for indemnity clauses to be “buried” within other provisions of a contract.

You will therefore need to review all parts of the contract, including any schedules or annexures, to make sure you haven’t missed any indemnity clauses.

Using the search function, “CTRL + F + indemni*”, can be a helpful tool in finding hidden indemnities. This will help you quickly locate any indemnity clauses that may be tucked away in other parts of the contract.

Links with Insurance Policies

Indemnities are very closely linked to insurances taken out under the contract.

Before signing a contract, you will need to review your organisation’s insurance policy/policies, to make sure there is nothing in that policy which conflicts with the indemnity.

Get Legal advice

Indemnities are one of the clauses upon which you should always seek Legal advice.

Key Takeaways

Here are some key takeaways about indemnity clauses:

  1. Make sure you take the time to thoroughly review the contract and understand the terms of any indemnity clauses. This will help ensure that you are fully informed about your organisation’s rights and obligations under the contract. It will also help you to gain a clear understanding of the protections and limitations provided by the indemnity clause.

  2. When reviewing an indemnity provision, identify the party being indemnified, the party providing the indemnity, and the specific circumstances that trigger the indemnity.

  3. The type of losses or damages that will be indemnified, as well as any exclusions or reductions of the indemnity, should also be clear.

  4. It should be apparent whether the indemnity is a hold harmless provision, through use of the “hold harmless” language.

  5. Be conscious that the bargaining power of a party can affect how strong or weak the indemnity becomes during commercial negotiations.

  6. Because indemnities are contractual provisions, they are aimed at giving one party recourse against the other party without having to commence legal proceedings. However, if the other party refuses to pay out under the indemnity, it may be necessary for the first party to take the indemnifying party to court.

  7. The terms of an indemnity clause are often a sticking point in negotiations, as both parties want to make sure that they are protected and have a clear agreement about their obligations.


Indemnity clauses are a crucial part of most contracts. They protect one party from financial losses that may arise in specific circumstances.

Carefully reviewing and negotiating the terms of an indemnity clause can ensure that all parties involved are protected and have a clear understanding of their obligations in the event of a loss or damage. Click here to read how to negotiate an indemnity clause.

Because they are so common in all industries, understanding the purpose of indemnity clauses and how they work will make it easier for you to navigate contracts with confidence.

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