Indemnity
Indemnity means compensating someone for a loss or damage, or agreeing in a contract to do so. In insurance, the principle of indemnity aims to restore the insured to their pre-loss financial position, without allowing profit from the loss.
Last updated October 13, 2026
How indemnity works
The word has two related meanings, and both come up for growing companies.
The insurance principle of indemnity
Insurance is generally designed to pay the actual financial loss from a covered event, up to the policy limit, and no more. That discourages over-insuring or causing a loss to profit from it. The insurer may pay in cash, or by repairing or replacing what was lost. The valuation method in a property policy, such as actual cash value or replacement cost, sets how the loss is measured.
Contractual indemnity
In a contract, one party (the indemnitor) agrees to reimburse the other (the indemnitee) for specified losses, often third-party claims. Indemnity clauses appear in customer agreements, vendor contracts, and leases. The promise is only as reliable as the indemnitor's ability to pay, which is one reason contracts often require insurance.
The insurance and contract senses connect through insurance requirements. Contracts frequently require a party to carry coverage that supports its indemnity promise, which is why a broker reviewing a draft agreement can help identify gaps early.
Indemnify, hold harmless and defend
Contracts often use these words together, but they can mean different things. To indemnify is to reimburse a loss. To hold harmless is commonly read as protecting the other party from liability or loss. A promise to defend is a duty to take on or pay for the response to a claim. Some contracts blend the three, and how courts interpret them varies by state, so counsel should review the actual language. Some states also restrict certain indemnity provisions, particularly in construction contracts.
Example
A hypothetical software company agrees to indemnify an enterprise customer against third-party intellectual property claims tied to the software. A third party sues the customer. The company must reimburse the customer under the contract, and whether the company's own insurance responds depends on how its policies treat liability assumed by contract.
What to watch for
- Scope and caps. Indemnity clauses can be broad, uncapped, or limited to specific claims. Read what triggers the obligation.
- Insurance mismatch. Limits and exclusions in your policies may not match the exposure you accepted in the contract.
- Misconception. Indemnity does not mean the full cost of replacement in every case. The valuation clause, limits, and deductible shape the payment.
- Related terms. A duty to indemnify is the insurer's obligation to pay covered loss, which is separate from the duty to defend.
Indemnity vs. related terms
- Indemnity vs. duty to defend. An insurer's duty to defend is its obligation to provide or pay for a defense. Its duty to indemnify is its obligation to pay covered loss. They are separate, and the duty to defend is often broader.
- Contractual indemnity vs. additional insured status. An indemnity clause is a promise to reimburse. Additional insured status gives the other party rights under your insurance policy directly, subject to its terms. Contracts often require both.
- Indemnity vs. waiver of subrogation. A waiver of subrogation prevents an insurer from pursuing a party after it pays a claim. See subrogation. Indemnity is a promise to pay. Subrogation rights concern who can recover from whom afterward.
- Indemnity vs. liability assumed by contract. An insurer's treatment of liability you accept in a contract depends on the policy. A general liability policy has specific terms for assumed liability, and many professional policies exclude or limit it.
A second example: a data security indemnity
A hypothetical payments startup signs a partner agreement in which it indemnifies the partner for losses from the startup's data security failures. The contract includes a liability cap, but the cap does not apply to the indemnity. Months later, the partner incurs notification and investigation costs after a data incident at the startup. The startup is contractually responsible for reimbursing the partner, and the amount may exceed its policy limits. Whether its cyber or E&O policy responds depends on how those policies treat liability assumed by contract, and on the covered costs.
Before you sign an indemnity clause
- Is the clause mutual, or does only one side indemnify?
- Is it capped, and are there carve-outs from the cap?
- Does it cover only third-party claims, or also the other party's own losses?
- What triggers it, and does it require fault or apply regardless?
- Who controls the defense and its costs, and what notice procedure applies?
- Does your insurance respond to the liability you are accepting, and are the limits adequate?
- Has counsel reviewed the language?
Common mistakes
- Accepting uncapped indemnities without checking what insurance supports them.
- Assuming a policy covers every liability assumed in a contract.
- Treating an indemnity as the same thing as being named an additional insured.
- Overlooking that the promise is only as good as the indemnitor's ability to pay.
- Not asking your broker to read the draft agreement's insurance requirements at the same time as the legal terms.
Why it matters for technology, AI, fintech and digital-asset companies
Enterprise customers and financial partners often ask vendors for indemnities covering IP infringement, data incidents, or regulatory issues. Agreeing to broad terms without checking insurance can leave uninsured exposure. Review contracts alongside errors and omissions and cyber wording before signing.
Indemnity also appears inside the company. Companies commonly promise to indemnify their directors and officers in bylaws or agreements, and D&O insurance backs that promise through Side B, with Side A covering individuals when the company cannot pay. Investors and lenders also ask for indemnities in financing documents. A venture-backed company that agrees to many indemnities may find its obligations exceed what its policies were built to cover, so it helps to track them in one place. See D&O coverage, venture-backed startups and AI and emerging tech.
Related terms
Frequently asked questions
What is indemnity in insurance?
Indemnity means compensating someone for a loss or damage, or agreeing in a contract to do so. In insurance, the principle of indemnity aims to restore the insured to their pre-loss financial position, without allowing profit from the loss.
What is the principle of indemnity?
It is the idea that insurance should compensate the actual financial loss from a covered event, up to the limit, and not leave the insured better off. It supports fair claim payments and discourages fraud or deliberately causing losses. How it applies varies by policy type and valuation clause.
What is the difference between indemnity and insurance?
Indemnity is the concept of compensating loss, either by insurance or by a contract promise. Insurance is one way to fund it. A contractual indemnity is a promise from another party, and its value depends on that party's ability to pay, which insurance can help support.
What is an indemnification clause?
An indemnification clause is a contract term in which one party agrees to reimburse the other for specified losses, often claims by third parties. Scope, caps, and defense obligations are negotiated, and insurance may or may not cover the liability assumed. Have counsel and your broker review them.
What is the difference between indemnity and a hold harmless clause?
They are often used together. Indemnity generally means reimbursing a loss, and hold harmless is commonly read as protecting the other party from liability. How courts read the two words varies, and some contracts treat them as the same, so rely on counsel to interpret the specific language.
Does my insurance cover indemnity obligations I accept in a contract?
Sometimes. Whether a policy responds to liability assumed by contract depends on its wording. General liability forms have specific terms for assumed liability, and many professional policies exclude or limit it. Ask your broker to check before you sign.
What is mutual indemnification?
It is a contract arrangement in which each party agrees to indemnify the other for specified losses, often tied to each party's own conduct or breach. It is more balanced than a one-way indemnity, but scope, caps and carve-outs still need careful review.
Is there usually a limit or cap on an indemnity?
It depends on the contract. Some indemnities are capped, some are uncapped, and many have specific carve-outs from a general liability cap. A cap is negotiated, so review it closely and compare it to your insurance limits.
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