What's the most important thing to negotiate in indemnification?

A liability cap is usually the most important protection. Without it, your exposure is unlimited. Try to cap indemnification at the contract value, your insurance limits, or a fixed dollar amount that represents reasonable risk.

Should indemnification be mutual?

Yes, in most cases. Each party should indemnify the other for claims arising from their own conduct. One-sided indemnification that only protects one party is a red flag and should be negotiated.

What if the other party won't agree to a cap?

Consider purchasing additional insurance to cover the exposure, or propose a tiered cap (e.g., lower cap for regular breaches, higher cap for gross negligence). You can also request that your indemnification be limited to amounts covered by your insurance.

How to Negotiate Indemnification Clauses: Limit Your Liability

Indemnification clauses can expose you to significant liability. Here's how to negotiate them to protect your interests without killing the deal.

Understanding What You're Negotiating

Indemnification clauses typically cover:

Third-party claims (lawsuits from others)
Legal defense costs
Judgments and settlements
Sometimes direct claims between the parties

Key Negotiation Points

1. Make It Mutual

Problem: One-sided indemnification puts all risk on you

Solution: Each party should indemnify the other for their own actions

Language: "Each party shall indemnify the other party for claims arising from the indemnifying party's..."

2. Limit to Your Own Conduct

Problem: Broad indemnification may cover the other party's negligence

Solution: Only indemnify for claims caused by your actions, not theirs

Language: Add "except to the extent caused by the negligence or willful misconduct of the indemnified party"

3. Cap Total Liability

Problem: Unlimited indemnification exposure

Solution: Cap at contract value, insurance limits, or fixed amount

Language: "Notwithstanding the foregoing, total indemnification obligations shall not exceed [contract value/insurance limits/$X]"

4. Require Notice and Cooperation

Problem: You could be liable for poorly handled claims

Solution: Require prompt notice and right to participate in defense

Language: Include requirements for:

Prompt written notice of claims
Right to control or participate in defense
Cooperation from the indemnified party
Approval rights for settlements

5. Exclude Certain Types of Damages

Problem: Indemnification for consequential damages could be massive

Solution: Exclude indirect, consequential, and punitive damages

6. Insurance Requirements

Solution: Tie indemnification to insurance coverage

Language: "Indemnification obligations shall be limited to amounts recoverable under [party's] insurance policies"

Carve-Outs to Request

Claims arising from the other party's materials or instructions
Claims based on modifications you didn't make
Claims arising from combination with third-party products
Claims covered by the other party's insurance

How to Frame the Conversation

Opening: "I want to make sure the indemnification clause reflects a fair allocation of risk between us."

Explaining Your Position: "The current language could make me responsible for claims caused by your actions. I don't think that's the intent."

Proposing Solutions: "Let's make this mutual and add a cap tied to the contract value. That protects both of us."

Common Pushback and Responses

"This is standard language"

Response: "Even standard clauses can be tailored to the specific deal. What's the specific risk you're trying to protect against?"

"We need this protection"

Response: "I understand. Let's find a way to give you that protection while capping my maximum exposure."

"Our lawyers won't approve changes"

Response: "I'd be happy to discuss directly with your legal team to explain my concerns."

How to Negotiate an Indemnification Clause