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Indemnity
Also called indemnification, indemnification clause.
A contractual promise to cover another party's losses, usually including their legal costs, and one of the few clauses that can cost more than the transaction it sits inside.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
An indemnity shifts loss. Where liability would otherwise fall where it lands, an indemnity moves it to the indemnitor by agreement. It is unlimited unless it says otherwise, and it usually does not say otherwise.
The parts that determine its reach
- Trigger: losses "arising out of" or "relating to" the agreement is broad; losses "caused by the indemnitor's breach" is narrow. The difference is most of the clause's value
- First-party or third-party: a third-party indemnity covers claims brought by outsiders. A first-party indemnity lets the counterparty recover its own direct losses from you, which is far wider and much less commonly negotiated
- Defence obligation: paying counsel from the day of filing, before any finding of liability, and often with the indemnitee choosing the lawyer
- Carve-outs: whether the indemnitee's own negligence or wilful misconduct is excluded. Some states restrict indemnities that cover a party's own negligence, particularly in construction contracts; the rules vary
- Survival: indemnities normally outlive termination of the agreement
- Caps: rare in funding documents
In small-business funding documents
Merchant to funder: covering claims arising from the business, from account debtor disputes, from chargebacks, and from any breach. Seller to factor: covering disputed invoices, offsets and warranty claims from customers. ISO to funder: covering the broker's own conduct. Guarantor indemnities sometimes appear alongside the guaranty, doing a similar job by a different route.
Where this one catches people
Read the indemnity together with the attorney's fees clause. A broad indemnity that covers "all costs including reasonable attorneys' fees" and is triggered by "any claim relating to this agreement" can be argued to require the merchant to fund the funder's legal costs in a dispute between the merchant and the funder. Whether that argument succeeds depends on the drafting and the jurisdiction, but the clause is written to make it available, and the prospect of paying both sides' counsel is a settlement lever regardless of the merits.
Where you will meet this term
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Indemnity — common questions
What does indemnity mean?
A contractual promise to cover another party's losses, usually including their legal costs, and one of the few clauses that can cost more than the transaction it sits inside.
Where does indemnity catch people out?
Read the indemnity together with the attorney's fees clause. A broad indemnity that covers "all costs including reasonable attorneys' fees" and is triggered by "any claim relating to this agreement" can be argued to require the merchant to fund the funder's legal costs in a dispute between the merchant and the funder. Whether that argument succeeds depends on the drafting and the jurisdiction, but the clause is written to make it available, and the prospect of paying both sides' counsel is a settlement lever regardless of the merits.
Is indemnity the same as an interest rate?
Indemnity is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does indemnity apply to?
Merchant Cash Advance, Working Capital, Invoice Financing, Credit Card Processing.
Is there a worked example of indemnity?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside indemnity?
Attorneys' fees clause, Guaranty, Hold harmless clause, ISO agreement, Liability.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.