Indemnification

Definition of Indemnification

Indemnification is a contractual obligation where one party agrees to compensate another for specific losses, damages, or claims arising during performance. Also known as a hold harmless clause, indemnification allocates financial responsibility for potential risks like intellectual property infringement, negligence, or third-party lawsuits.

It’s one of the most negotiated provisions in business contracts and a cornerstone of risk management.

Why Indemnification Matters

Properly drafted indemnification clauses prevent costly disputes and ensure fair risk allocation. They define what kinds of losses are covered, set limits on liability, and specify the process for handling claims.

Well-structured indemnification terms:

• Clarify financial accountability between parties
• Reduce exposure to unpredictable damages
• Protect both sides from third-party claims
• Establish clear reporting and defense obligations
  
  

Best Practices for Indemnification

1. Clearly define the scope of indemnification (who, what, and when).
2. Limit coverage to specific, foreseeable risks.
3. Align with insurance provisions for consistency.
4. Require prompt notice and defense participation.
5. Ensure reciprocal indemnities where appropriate.
   
   

Example of Indemnification in Practice

A software vendor includes an indemnification clause guaranteeing to defend and compensate the customer if a third party claims copyright infringement.