Have you ever signed an agreement with an indemnity clause and later realized it caused more trouble than protection? These clauses may seem like a shield—but they can backfire when you least expect it. Let’s explore when they become problematic.
Unbalanced protections harm negotiation
If your indemnity clause requires you to cover all losses—even minor ones—you may end up paying legal fees for others’ mistakes. This discourages fair bargaining and makes potential partners question your stance. You could lose trust before any conflict even arises.
Vague terms invite disputes
Clauses using broad language like “any claims” or “any losses” leave room for interpretation. The vagueness opens the door for aggressive claims against you—even when you aren’t at fault. Courts may rule in favor of the claimant if the wording is ambiguous.
One-sided clauses deter partners
When only one party shoulders all risk, others may refuse to sign or demand higher fees elsewhere. You might limit your business opportunities without realizing it, as partners avoid contracts that shift all liability onto them.
Regulatory claims slip through gaps
Indemnity clauses often exclude statutory or regulatory claims. That means you could still face penalties that aren’t covered. Failing to explicitly include such risks might cost you dearly in regulatory fines or third-party actions.
Insurance gaps leave you exposed
You may assume your insurance covers indemnity obligations. But if your policy excludes legal defense for certain third-party claims, you’ll be on the hook. Always check your ISOs—or endorsements—to confirm coverage aligns with these clauses.
Mitigation steps reduce risk
Draft clear, mutual indemnity language that defines covered claims precisely. Ensure limits align with your insurance and include carve-outs for known exceptions. Ask for caps to prevent open-ended obligations. Always confirm with your insurer before agreeing.
When you negotiate the indemnity clause, make sure it’s fair, clear, and supported by insurance. By defining terms precisely and limiting your exposure, you’ll avoid costly surprises. Use these tips to turn that clause from a trap into a tool that protects both sides.
