An indemnity agreement is a legal contract between an indemnitor (the party taking on responsibility) and an indemnitee (the party being protected). The indemnitor agrees to reimburse the indemnitee for any losses, damages, or claims arising from the indemnitor’s actions. This transfers financial risk from one party to the other.

This agreement is also known as an indemnification agreement, a hold harmless agreement, and an indemnification clause.

In this article, we’ll cover everything you need to know about indemnity agreements: what they are, how they work, the different types, key clauses to include, when you need one, and how to create one.

Let’s get into it.

Legal disclaimer: PandaDoc is not a law firm, and this article is for informational purposes only. It is not legal advice. Indemnity agreements are not always enforceable, and the protections they offer vary by jurisdiction. Talk to a qualified attorney to determine whether an indemnity agreement is right for your situation and what liabilities you may hold if you sign one.

How an indemnity agreement works

An indemnity agreement needs two parties, including the indemnitor and the indemnitee. The indemnitor is the party that agrees to bear financial responsibility, and the indemnitee is the party that gets protection.

For example, a SaaS vendor might be hired by a small business to manage their customer data. Say the vendor’s software causes a data breach that exposes the client’s customers, and those customers decide to file claims against the client.

Because the contract includes an indemnity clause, the vendor (indemnitor) is responsible for covering those costs, not the client (indemnitee).

What triggers the obligation?

The indemnity clause kicks in whenever a covered event occurs. This would typically be a loss, claim, or lawsuit that falls within the scope of the agreement. When that happens, the indemnitor has to:

  • Pay damages — covering any financial losses the indemnitee faces as a result of the covered event
  • Cover legal fees — reimbursing the indemnitee for attorney costs and related expenses
  • Manage the legal defense — stepping in to handle the indemnitee’s defense directly (this is known as a “duty to defend” and only applies when it’s explicitly included in the clause)

Indemnity vs. breach-of-contract damages

These are two separate things. Breach-of-contract will address any direct losses between the two parties in the contract. Indemnity covers third-party claims. These are situations where an outside party sues the indemnitee because of something the indemnitor did.

Both can come up from the same incident, but they work independently.

Obligations that survive contract termination

Indemnity obligations will typically remain in effect after the contract ends. This means that even if a service agreement expires, the indemnitor could still be held responsible for any covered events that happened during the contract period.

A lot of businesses miss this detail, so it’s important to track in your contract management process.

Types of indemnity agreements

The types of indemnity agreements differ in how much liability is transferred and whether fault plays a role in deciding who pays.

Here are the three main types:

Type Meaning Risk level for indemnitor Who it favors Example
Broad form The indemnitor covers all losses, including those caused by the indemnitee’s own negligence Highest Indemnitee A construction contractor agrees to cover all jobsite injury claims, even those caused by the client’s own site manager
Intermediate form The indemnitor covers losses caused by either party’s negligence, but not losses caused solely by the indemnitee Moderate Balanced A consulting firm covers client losses arising from a shared project failure, but not losses the client caused entirely on their own
Comparative / proportional form Each party’s liability is proportional to their degree of fault Shared Both parties equally Two SaaS companies entering a joint integration agreement each bear costs in proportion to their contribution to a data error

A note on broad form agreements and state law

It’s important to note that some states restrict or void broad indemnity clauses by statute, especially in construction contracts. It’s not a case where one rule applies everywhere. You want to consult a local attorney before signing the agreement, especially if it has broad form language.

Mutual vs. unilateral indemnity

Indemnity agreements can also differ in direction:

  • Unilateral indemnity means only one party indemnifies the other. This is common in service agreements where one party takes on significantly more risk. For example, a freelance developer agreeing to cover a client’s losses from bugs in delivered code.
  • Mutual indemnity means both parties agree to indemnify each other for losses arising from their own actions. This is standard in SaaS subscription agreements and business partnerships, where risk is more evenly distributed between the parties.

Key clauses in an indemnity agreement

Whatever you include in the agreement will determine what’s covered, who’s exposed, and what happens when a claim comes up. Here’s a list of contract clauses to review before you sign. You want to make sure none are missing before you send it off.

  1. Scope of indemnity: This defines what losses are covered, whether it’s property damage, legal costs, third-party claims, or a combination. If you have vague scope language included, it’s likely to lead to a dispute.  So you want to specify these categories of loss explicitly.
  2. Triggering events: These are events that specify what must happen before the obligation to activate. This is usually negligence, breach of contract, or a defined incident type. Without this, either party can make the case that the clause doesn’t apply.
  3. Party identification: This is naming exactly who is bound to the agreement. “The company” is not enough. Include legal entity names and if it’s applicable, decide whether affiliates, subsidiaries, or contractors should be covered.
  4. Duty to defend: This will determine whether the indemnitor has to fund and manage the legal defense, not just reimburse costs after the fact. This distinction is high-stakes and often overlooked. If this protection matters, it needs to be written explicitly.
  5. Indemnity cap: This places a financial ceiling on the indemnitor’s total exposure. Uncapped indemnity is a significant red flag for both parties. A cap that’s tied to contract value or insurance limits will give both sides a workable number.
  6. Exclusions: This lists what the indemnitor will not cover. Often this will be gross negligence, wilful misconduct, and losses caused solely by the indemnitee. Without this clause, an indemnitor can be held responsible for losses they had no part in causing.
  7. Third-party claims process: This clause sets the rules for outside claims like notice timelines, cooperation requirements, and settlement control rights. Without having notice requirements,  an indemnitor’s obligations can be voided entirely, even if it’s a legitimate claim.
  8. Survival clause: A clause that specifies how long obligations last after the contract ends. Without it, an indemnitor could argue their obligations expired with the agreement, so the duration should be specified explicitly.
  9. Governing law: This explains which jurisdiction’s law applies. Some states have anti-indemnity statutes that restrict or void certain clause types. Choosing governing law without understanding local rules can make a clause unenforceable.

Ready to create your indemnity agreement? Start with PandaDoc’s free template.

Indemnity agreement vs. hold harmless agreement

Despite these terms being used interchangeably in some contexts, they aren’t exactly the same.

A hold harmless agreement is about preventing the protected party from being held liable for specific losses.

An indemnity agreement does that, but it also requires the indemnitor to actively reimburse losses if they occur.

Most commercial contracts actually combine both of these into a single clause known as “indemnify, defend, and hold harmless.” Each aspect does something different:

  • Indemnify — the indemnitor will reimburse the indemnitee if those losses occur
  • Defend — the indemnitor will fund and manage the legal defense
  • Hold harmless — the indemnitee cannot be held liable for the covered losses

The distinction between these terms can be state-law-dependent. So some courts will treat them as synonymous, while others don’t. For jurisdiction-specific guidance, consult a qualified attorney.

You can also start with a hold harmless agreement template if you know that’s the protection you need.

When do you need an indemnity agreement?

Any kind of business relationship where one party’s actions could expose the other to financial loss or third-party claims is a candidate for indemnification.

Here are six common scenarios:

  1. SaaS vendor agreements — The vendor will typically indemnify the client against third-party claims that come up from IP infringement or data breaches that are caused by the vendor’s software.
  2. Freelancer and consultant contracts — The consultant would indemnify the client for losses that are caused by errors, omissions, or negligence in their delivered work.
  3. Commercial leases — The tenant typically indemnifies the landlord against claims that come up from the tenant’s use of the property, including injury to visitors or damage caused by the tenant’s business.
  4. Construction subcontracting — The subcontractor indemnifies the general contractor for losses caused by the subcontractor’s work on site. In this scenario, broad form clauses can appear and state-law restrictions may apply.
  5. Mergers and acquisitions transactions — The seller will usually indemnify the buyer against undisclosed liabilities that come up after the deal closes.
  6. Event and venue contracts — The event organiser would indemnify the venue against claims that surface from the event itself, like injuries, property damage, or third-party disputes.

An indemnity agreement is not necessarily the right tool in all scenarios. They are not meant to:

  • Cover a risk that has already materialised, as they are forward-looking agreements. 
  • Replace insurance, since indemnity and insurance are complementary, not interchangeable.
  • Resolve disputes between the two contracting parties over direct losses, as that is breach-of-contract territory.

How to negotiate an indemnification clause

If you’re reviewing an indemnity clause and want to know what you can push back on, this section is for you.

Here’s a checklist of six aspects you want to consider:

  1. The indemnity cap: If there’s no cap, you can push for one. Uncapped indemnity means there’s unlimited exposure, which is rarely acceptable regardless of which side you’re on. A cap equal to 12 months of contract fees is a widely used SaaS market standard. You can tie it to something concrete like contract value, insurance limits, or a fixed amount.
  2. Trigger language: “Arising from or related to” is broad. “Directly caused by” is narrower and significantly safer for the indemnitor. Make sure you review the trigger language carefully, because even a few words can determine whether a marginal claim is covered or excluded.
  3. Mutuality: If only one party carries indemnity obligations, consider pushing for symmetric terms. In SaaS and partnership agreements especially, mutual indemnity is the standard. Having any kind of one-sided clause in a relationship where both parties already carry risk is something to question. 
  4. Gross negligence and wilful misconduct carveouts: If these aren’t already included, push to have them added. No party should be required to indemnify losses caused by the other party’s intentional misconduct or gross negligence. 
  5. Duty-to-defend control: If your agreement includes this, you want to clarify who controls the legal defense and whether or not the indemnitor can settle without the indemnitee’s consent. If an indemnitor settles on terms the indemnitee hasn’t approved, this can create serious exposure. Require written consent before any settlement is finalised.
  6. Notice requirements: Having short or vague notice windows can lead to a legitimate claim being voided before it gets off the ground. You want to make sure the required notice period is realistic and not a trap. This means accounting for weekends, internal escalation, and legal review. 

If you want a broader view of contract review strategy, check out our guide on how to negotiate a contract.

What should be included in an indemnity agreement?

An indemnity clause or agreement should outline the basic terms and conditions of the agreement between two parties.

In particular, the agreement needs to set the rules of engagement for when the clause activates.

To do that, any indemnity agreement should include the following:

1. Names of the parties involved

As with any valid contract, this should include any and all parties involved in the agreement.

Keep in mind that adding more than one party to the agreement can quickly complicate other sections of the agreement.

2. Nature of the loss or damage

The contract should specify what kind of actions or omissions would trigger the obligations of the contract.

This could range from property damage to malpractice claims.

3. Obligations of each party

While the previous sections should specify responsibilities, the clause also needs to demonstrate what financial obligations fall onto each party in the event that the indemnity agreement is activated.

4. Extent of coverage

This section describes what indemnity protections will actually cover.

Some agreements extend coverage to the actions of other parties and can assign liability for their negligence to your company.

Be sure that you understand what liabilities you have chosen to accept prior to signing the agreement.

5. Limitations and exemptions

Many indemnity agreements have exceptions, such as a bad faith clause or language that invalidates an agreement if the indemnitor benefits from willful misconduct.

You might also see liability limitations in the form of an indemnity cap.

Keep in mind that the components of an indemnity agreement are often quite vague.

This happens because the agreements are meant as a safeguard against incidents that haven’t yet occurred.

For example, a rental property agreement might say that the tenant is responsible for any costs related to property damage incurred during their stay, but it can’t specify an exact monetary cost for damage that has not yet been incurred.

See also:

The difference between a lease and a rental agreement

What do indemnity agreements cover?

Indemnity agreements are broad and can cover a wide range of both personal and commercial scenarios, however, they tend to be more common in high-risk situations.

Here’s a closer look at common uses for indemnification clauses:

  • Product liability.
  • Personal injury.
  • Property damage.
  • Intellectual property infringement.
  • Malpractice.

Keep in mind that known illegal acts are exempted from indemnity protections.

Where are indemnity agreements typically located?

Often, in business contracts, indemnity agreements are added as clauses in a larger contract.

For example, a construction company might include an indemnity clause in its hiring contract that prevents workers from filing lawsuits for on-site injuries due to negligence.

Because these agreements and waivers are usually brief, it’s rare to see them as a standalone contract — but they do exist.

You might end up using a standalone agreement if you need to introduce it into a business contract at a later stage of a working relationship or if the nature of the indemnity needs to be negotiated separately.

Who should sign an indemnity agreement?

An indemnity agreement should be signed by both the indemnitor and the indemnitee.

The indemnitor is the party who agrees to pay for any damages or losses that may incur, while the indemnitee is the party who agrees to be protected by the indemnity agreement.

While you’ll want to check with your law firm or legal counsel before signing the document, both contracting parties need to sign before it goes into effect.

Most companies prefer to have this matter handled before a business begins so that the liabilities and protections are already in place.

Types of indemnity agreements

In general, there are three types of indemnity agreements that you’re likely to see:

Broad form indemnity

This form of agreement relieves the indemnitee of all liability, including their own and any liability caused by a third party.

In essence, all other parties are responsible for the indemnitor’s willful misconduct.

Due to its broad and non-specific nature, this type of agreement is unenforceable in many states and jurisdictions.

Intermediate form indemnity

In this type of agreement, the indemnitee is protected unless that party is solely at fault.

This protects the indemnitor and any third parties from liability should the indemnitee choose to act irresponsibly while under indemnity protection.

Often, intermediate-form agreements will include the phrasing “caused in part,” indicating that parties other than the indemnitee must play some role in the negligence before the clause goes into effect.

Comparative form indemnity

This type of agreement relies on a relational comparison.

The negligence incurred is compared with the negligence of all parties before a final determination of liability is made.

Typically, a comparative form agreement will include the phrasing, “only to the extent,” indicating that a comparison will be drawn as damages are evaluated.

Keep in mind that indemnity agreements vary based on regions and jurisdictions.

The type of agreement that may be valid in Kentucky or Mississippi may have limitations or be deemed entirely invalid in New York or California.

Indemnity caps

While indemnity agreements can help protect a company from another party’s negligence, limitations can be placed on these agreements to mitigate responsibility and risk for all involved parties.

Often, these limitations come in the form of indemnity caps, which limit the amount of liability that the indemnitee must bear to a specific dollar amount.

Indemnity caps allow companies who assume liability to quantify the amount of risk they take on.

For example, if the maximum payout for indemnity is capped at $1 million, the business can determine whether or not it wants to bear that financial burden as part of its negotiated terms.

If the business is forced to pay liability claims due to indemnification, the maximum they would pay is $1 million, even if the damage incurred exceeds that cap.

How to write an indemnity agreement

Here are eight steps you can follow to help you draft your indemnity agreement.

While you can start from scratch, you might also want to consider using the Indemnity Agreement Template from the PandaDoc template library.

1. Identify the parties

As with any contract, you’ll need to gather full legal names, entity types (LLC, Inc., sole proprietor, etc.), addresses, and key points of contact for both parties.

Having vague identification like “the vendor” or “the client” will make it hard to enforce later.

2. Define the scope of covered losses and exclusions

You need to state exactly what categories of loss are covered in the agreement. Then, you can list what isn’t covered, like gross negligence, wilful misconduct, and losses caused solely by the indemnitee.

Both parties need to understand these boundaries before signing.

3. Specify the triggering events

You should write out precisely what needs to happen for the obligation to activate.

Saying “arising from or related to” is pretty broad, while “directly caused by” is a more pointed phrase. Choose language that will reflect the actual risk you’re allocating.

4. Decide on duty-to-defend language

You should decide whether the indemnitor will fund and manage the legal defense or simply reimburse after a judgement is made.

If you want the duty to defend included in the agreement, you need to write it explicitly. Not having this spelled out will default to reimbursement only.

5. Set the indemnity cap

You need to agree on a financial ceiling for the indemnitor’s total exposure. If you intend to limit the extent of the agreement, you need to specify those limitations and the scope of damages that the indemnitor can claim.

Record what amount is agreed upon, whether that’s tied to contract value, insurance limits or a fixed amount. You can include this directly in the clause.

6. Specify governing law and jurisdiction

You should name the state or jurisdiction whose law governs the agreement.

Remember that you can specify which state law will govern your contract, even if you aren’t in that state. But location will play a role in determining validity and enforceability, especially if there are anti-indemnity statutes at play.

7. Add a survival clause

Make sure to state explicitly that indemnity obligations will last after the contract ends, and specify for how long. Without having this step, the indemnitor can argue that their obligations ended when the contract did.

8. Obtain signatures from both parties

To make sure the document is valid, both parties need to consent to the agreement. Add signature lines and indicate an acknowledgement of the agreement legalities. This is so all parties are aware of their obligations.

You can use a legally binding eSignature to finalize the document.

Managing indemnity agreements at scale

It’s not as big of a deal to review a single indemnity agreement, but when you’re signing dozens or even hundreds of contracts every year, it’s a lot harder.

You have to track which agreements have caps, which have survival clauses, and which are using non-standard trigger language. All of this can become a real compliance risk when you’re relying on a manual system.

Inconsistent clause language across various agreements means unequal financial exposure. And many times, no one will notice until a claim actually arises.

A contract management software platform addresses this issue directly. When it comes to indemnity clause management, here’s what you get with a contract management tool:

  1. Centralised clause search to help you find every agreement in your portfolio that contains indemnification language, without having to open files one by one.
  2. Standardised templates, which help you make sure every indemnity agreement your team sends is consistent with approved language.
  3. Obligation tracking to help you monitor survival periods and renewal dates so obligations don’t slip past their intended end date unnoticed.
  4. Non-standard clause flagging to help you identify agreements with non-standard or uncapped indemnity clauses during review.

PandaDoc supports all of these features so that you can create, send, eSign, and track all of your indemnity agreements in one platform.

And if you’re a team sending agreements at volume, PandaDoc Recipes can help you automate your document generation and routing from beginning to end.

See how PandaDoc handles contract management here.

Better agreements with PandaDoc

Indemnity agreements, like many other business contracts, can be complicated to create and manage.

These deals must be structured and negotiated before signing, then safely stored while the contract is in effect.

This can be a challenge for small businesses and major companies alike, but PandaDoc can help!

Our software platform provides a built-in document editor for streamlined contract creation, fast negotiations, and secure storage.

No matter where you are in your contract process, we have the tools to help.

Sign up for a free 14-day trial and see how PandaDoc can take your document workflow to the next level.

Disclaimer

PandaDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDocs services are governed by our Terms of Use and Privacy Policy.

Frequently asked questions

  • A hold harmless agreement prevents the protected party from being held liable, while an indemnity agreement requires the indemnitor to actively reimburse those losses. A lot of commercial contracts combine both of these, but whether the terms are treated as distinct depends on jurisdiction. You should consult an attorney for guidance.

  • These include broad form (indemnitor covers all losses, including the indemnitee’s own negligence), intermediate form (covers losses caused by either party, but not losses caused solely by the indemnitee), and comparative form (each party’s liability is proportional to their degree of fault).

  • This means that the indemnitor has to fund and manage the legal defense, not simply reimburse costs after a judgment is made. It also only applies when it’s explicitly written into the clause.

  • You should confirm the scope is explained clearly, the triggering events are explicitly defined, a cap is present, gross negligence and wilful misconduct are excluded, and a survival clause is included.

  • Not quite. A waiver of liability will give up the right to sue, while an indemnity agreement requires active compensation if a covered loss occurs. They are two related clauses, but they are intended for different purposes.

  • This means that both parties agree to indemnify each other for losses arising from their own actions. This is standard in most SaaS and partnership agreements. This is different from a unilateral indemnity clause, which means only one party carries the obligation.

  • It will depend on jurisdiction, how the clause is written, and the agreement type. Broad form clauses are unenforceable in some states, and vague language can void a clause even when the agreement type is permitted. That’s why having it reviewed by a qualified attorney is a good idea.

  • Yes, PandaDoc has a free indemnity agreement template that you can customize, eSign, and track in PandaDoc. It’s a great starting point, but it should never replace legal advice.