Should I ever agree to an uncapped indemnity?

Ideally, no. An uncapped indemnity means your potential liability is infinite. Always try to link the indemnity to your insurance limit or a multiple of the contract value.

What does 'indemnify and hold harmless' mean?

It means you will pay for their losses (indemnify) and you also promise not to sue them for any related issues (hold harmless). It is a double layer of protection for the other party.

Does professional indemnity insurance cover these clauses?

Usually, yes, but only if the loss would have existed anyway under common law. If you agree to an unusually broad indemnity that goes beyond standard negligence, your insurer might refuse to pay the claim.

Blog · ContractChecker

Understanding Indemnity Clauses in Plain English

22 September 2026 · 3 min read

When you sign a business contract, you will almost certainly encounter a section titled 'Indemnity'. To most people, this sounds like standard legal background noise. However, it is one of the most powerful and potentially expensive parts of an agreement. In simple terms, an indemnity is a promise by one party to pay for another party's losses if a specific event occurs. Unlike a standard claim for breach of contract, an indemnity can often bypass usual legal limits on what can be recovered, making it a significant financial risk if not managed correctly.

How an indemnity works in practice

Think of an indemnity as a 'hold harmless' agreement. If you indemnify a client, you are agreeing to compensate them for any loss, damage, or legal costs they suffer because of your actions or a specific problem identified in the contract. It shifts the financial risk from their shoulders to yours.

For example, if you provide software to a company and that software accidentally infringes on someone else's copyright, the company might be sued. If your contract includes an indemnity for intellectual property, you must pay their legal fees and any damages they are ordered to pay. You are effectively acting as their insurer for that specific issue.

Common types of indemnity you will encounter

Not all indemnities are the same. Some are narrow and fair, while others are broad and risky. Understanding the scope is essential before you sign.

Most business agreements focus on a few key areas where the risk of third-party claims is high. You should look out for these specific categories:

Third-party IP claims: Protecting the client if your work infringes on someone else's patents or trademarks.
Data breaches: Covering the costs of fines or legal action if you lose a client's sensitive data.
Negligence: Agreeing to pay for physical damage or financial loss caused by your careless work.
Breach of statutory duty: Covering fines if you fail to follow specific regulations like GDPR or health and safety laws.

Why indemnity is different from standard liability

You might wonder why an indemnity is necessary if the contract already has a general liability clause. The difference lies in how easy it is for the other party to get their money. In a standard breach of contract claim, the 'victim' has a duty to mitigate their losses—they must try to keep the costs down. They also have to prove that your breach directly caused the specific loss.

With an indemnity, these protections often disappear. The claimant might not have a duty to mitigate their loss, and they may be able to recover 'indirect' losses that would usually be excluded. This is why it is vital to limit your indemnity. You can do this by capping the total amount you will pay or by ensuring the indemnity only applies to 'reasonable' and 'foreseeable' losses.

Reviewing these details manually is time-consuming. Tools like Jittan's ContractChecker can help by scanning your agreements for red flags, fairness issues, and practical points to consider, ensuring you aren't agreeing to an unlimited financial burden.

Indemnity clauses are about allocating risk rather than punishment. By understanding what you are promising to pay for, you can negotiate fairer terms and protect your business from unexpected financial shocks.

Quick answers

Should I ever agree to an uncapped indemnity?: Ideally, no. An uncapped indemnity means your potential liability is infinite. Always try to link the indemnity to your insurance limit or a multiple of the contract value.
What does 'indemnify and hold harmless' mean?: It means you will pay for their losses (indemnify) and you also promise not to sue them for any related issues (hold harmless). It is a double layer of protection for the other party.
Does professional indemnity insurance cover these clauses?: Usually, yes, but only if the loss would have existed anyway under common law. If you agree to an unusually broad indemnity that goes beyond standard negligence, your insurer might refuse to pay the claim.