An indemnification clause is a provision in which one party agrees to cover the other party's losses, legal costs, and damages in defined situations. In plain English: if something goes wrong and someone gets sued, the indemnifying party pays — even if they weren't the one being sued.

It's one of the most consequential clauses in any commercial contract. It's also one of the least read.

What Indemnification Actually Obligates You To

When you indemnify another party, you're agreeing to step in and absorb their losses. That typically includes three categories of cost: the judgment or settlement amount in any lawsuit, the legal defense costs (attorney fees, court costs, expert witnesses), and any related expenses the indemnified party incurs while the claim is pending.

The scope depends on how the clause is written. A broad indemnification clause might read:

"Contractor shall indemnify, defend, and hold harmless Company and its officers, directors, employees, and agents from and against any and all claims, damages, losses, costs, and expenses, including reasonable attorneys' fees, arising out of or related to Contractor's performance under this Agreement."

"Any and all claims... arising out of or related to" is very broad language. If a third party sues the company and can connect the lawsuit to anything the contractor did — or failed to do — the contractor potentially owes indemnification. The defense obligation alone can run $50,000–$150,000 in legal fees before a case resolves.

One-Way vs. Mutual Indemnification

A one-way indemnification clause obligates only one party — typically the vendor, contractor, or smaller party — to indemnify the other. The larger company assumes no corresponding obligation to cover losses caused by their own actions or negligence. This is the structure that appears in most vendor-drafted contracts and the one worth pushing back on.

A mutual indemnification clause requires each party to indemnify the other for losses arising from their own actions. If the vendor's software has a security flaw that exposes your customer data, the vendor indemnifies you. If your misuse of the software causes a third-party claim, you indemnify the vendor. Each party absorbs the consequences of their own negligence.

Mutual indemnification is the standard in fairly negotiated commercial contracts. When you receive a one-way indemnification clause, you're being asked to absorb both your risk and theirs.

The Uncapped Indemnification Problem

Indemnification clauses without a liability cap expose you to unlimited financial liability. A lawsuit involving serious injury, data breach, or significant property damage can generate claims far exceeding the value of the contract you signed. If you've indemnified a party against "any and all claims" with no ceiling on what you owe, there's no contractual limit on your exposure — even if the contract was worth $5,000.

This is why LiabilityScore™ flags uncapped indemnification provisions as high-severity findings, similar to how we treat unlimited personal guaranties. Both create exposure that has no ceiling and no defined exit.

What to push for: Cap indemnification obligations at 12 months of fees paid under the agreement — or at the aggregate fees paid over the contract term. Exclude claims arising from the other party's own gross negligence or willful misconduct from your indemnification obligation. These are standard positions in well-negotiated vendor contracts.

Third-Party Claims vs. Direct Claims

Most indemnification clauses cover third-party claims — situations where someone outside the contract (a customer, a regulator, a bystander) brings a claim and the indemnifying party must step in. That's different from direct claims between the contracting parties themselves, which are typically governed by the limitation of liability clause.

Be careful when indemnification clauses blur this line by using language like "any losses, including those arising from claims by either party." That expands indemnification beyond third-party situations into covering the other party's direct claims against you — effectively eliminating the limitation of liability cap for those disputes.

The Bottom Line

Indemnification clauses are present in virtually every commercial contract. The questions to ask are: is it mutual or one-way? Is it capped? Does it include a carve-out for the other party's own negligence? And does it extend to third-party claims only, or also to direct claims?

Scan your contract through LiabilityScore™ before you sign. We identify whether your indemnification obligation is one-way or mutual, flag uncapped exposure, and give you specific language to request in negotiations. For a broader look at what to check before any commercial contract, see our pre-signature checklist.