What Every Business Owner Should Know About Indemnification Clauses
- Danielle Dudai
- Sep 2
- 3 min read
If you’ve ever scanned a contract and glossed over the “indemnification” clause, you’re not alone.
It’s one of the most misunderstood—and potentially dangerous—provisions in business agreements.
Whether you’re signing a client’s contract or drafting your own using a DIY template or AI tool, it’s critical to understand what indemnity means and how it can shift serious legal and financial risk.
In this article, I’ll break down indemnification in plain English, explain common pitfalls, and share what business owners need to consider before agreeing to—or imposing—these terms.
What Is Indemnification?
At its core, indemnification is a promise to protect someone from harm or loss. In contracts, it usually means one party agrees to cover the other party’s costs if a specific type of legal claim arises.
For example:
"Party A agrees to indemnify and hold harmless Party B from any and all claims, damages, and liabilities arising out of..."
Translation: If something goes wrong and a third party sues Party B, Party A has to cover the damages (money awarded in the lawsuit)—often including legal fees.
That sounds straightforward, but here’s the kicker: indemnity clauses are rarely that simple. They're often overly broad, poorly worded, or copied from contracts that don't fit the particular needs of the transaction or client.
Why It Matters
Agreeing to indemnify another party means you could be financially responsible for legal claims you didn't directly cause. Depending on the language, that could include:
- Lawsuits by third parties
- Employee misconduct
- Intellectual property infringement
- Breach of contract or negligence
Indemnification can also mean paying for someone else’s attorney's fees—even if you’re not at fault. I've seen business owners unknowingly agree to cover deep six-figure litigation costs because they didn’t understand what they were agreeing to.
Key Questions to Ask Before Signing
1. What exactly am I indemnifying?
Make sure the scope is crystal clear. Is it limited to your own misconduct, or does it extend to
issues you can’t control (like a subcontractor’s mistake or a client’s misuse of your product or misuse of intellectual property)?
2. Is the indemnity mutual or one-sided?
Often, one party has all the protection, while the other assumes all the risk. If you're providing services or licensing IP, it may make sense to give some indemnity—but ask for one in return, especially if you're relying on the client's team or data.
3. Are there limitations or exclusions?
Well-drafted indemnity clauses will often include carve-outs—such as excluding indemnity if the other party is negligent or if the damages are indirect or unforeseeable.
4. Who controls the defense?
If you’re indemnifying someone, do you get to control the legal defense—or do they? If they choose their own attorney and strategy without your input, you could be stuck footing the bill for a legal mess you don’t control.
5. Are you insurable for the risks you’re taking on?
If your indemnity obligations go beyond what your insurance covers, your business or even your own personal assets could be exposed.
Drafting Indemnification Clauses in DIY Contracts
If you’re using a template or AI-generated agreement, be extra cautious about indemnity language. Many generic templates use broad, one-size-fits-all indemnity clauses that don’t reflect the real-world risks of your specific business.
Tips for safer drafting:
- Hire a lawyer. If you’re entering into a major deal, working with a new client or vendor, or seeing unfamiliar language in the contract, don’t go it alone.
- Make sure the scope of the indemnity clause is narrow.
- Avoid circular or unclear language.
Final Thought
You don’t need to be a lawyer to protect your business—but you do need to understand the basic risks in the contracts you sign. And indemnity is one of the biggest.
If you’re not sure what you’re agreeing to, don’t guess. The cost of not knowing is usually far greater than the cost of asking for help.
Need help reviewing a contract or making sense of an indemnity clause? I’m happy to take a look. Just reach out.
Danielle Dudai
Attorney; DUDAI LEGAL