What Is Indemnity? What You’re Actually Agreeing to Cover

An indemnity is a contractual promise to cover specified losses, liabilities or claims. Its effect depends heavily on the wording.

Lowdown

An indemnity sets out the events or losses one party has agreed to compensate the other for.^[1]

Why It Matters

In an ordinary claim for breach of contract, the person claiming compensation generally needs to show that the breach caused loss. Legal rules also affect which losses can be recovered.

An indemnity works according to its agreed wording. It might cover a particular breach, third-party claim, tax liability or another defined event. That is why phrases such as “all losses, claims and costs” deserve careful attention.^[1]

An indemnity does not automatically remove every restriction that would apply to an ordinary damages claim. Its scope and effect depend on the contract and applicable law.

Check what triggers the indemnity, which losses and costs it covers, and whether there is a financial limit. If the contract contains a general liability cap, check whether the indemnity falls within it or sits outside it.^[2]

Our Conclusion

Do not treat an indemnity as standard wording you can ignore. Check what activates it, what you may have to pay and whether any financial limit applies.

Sources

[1] Department for Education, Handling contractual indemnities

[2] Government Commercial Agency, The Mid-Tier Contract: Guidance for Buyers — Liabilities