Indemnification Clause Checklist: 7 Red Flags Every Associate Should Know

Indemnification Clause Checklist: 7 Red Flags Every Associate Should Know

Indemnification clauses are often the most heavily negotiated provisions in B2B contracts, yet they remain a common source of post-closing disputes. For associates reviewing agreements under time pressure, missing a single problematic phrase can expose your client to significant uncapped liability. Below is a practical checklist of seven red flags to spot during your next diligence review, with real-world examples under US common law.

1. Uncapped Liability (No Dollar Cap or Carve-Out)

The Red Flag: The clause states the indemnifying party is liable for "all losses, damages, and expenses" without any monetary limitation.

Why It Matters: Under common law, courts will enforce an uncapped indemnity as written. For a B2B service provider, this could mean indemnifying the client for consequential damages far exceeding the contract value.

Example: A SaaS vendor agrees to an uncapped indemnity for data breach. A minor security incident triggers litigation costs of $2 million, even though the annual subscription fee was only $50,000.

Action: Propose a cap equal to the contract value (or a multiple thereof) and exclude consequential damages from the indemnity scope.

2. "Indemnify, Defend, and Hold Harmless" Without Duty-to-Defend Limits

The Red Flag: The clause imposes an unqualified duty to defend, with the indemnitee controlling the defense and settlement.

Why It Matters: A duty to defend is broader than a duty to indemnify. The indemnitor must pay for defense costs even if the claim is groundless. Losing control over settlement can lead to unreasonable payouts.

Example: A client is sued for patent infringement arising from your software. The indemnification clause forces you to defend the case, and the client settles for $500,000 without your consent—leaving you with the bill.

Action: Negotiate the right to assume defense with counsel of your choice, and require the indemnitee to obtain your written consent before settling.

3. No "Proportionate Fault" or Comparative Negligence Carve-Out

The Red Flag: The clause makes you indemnify the client for losses caused in part by the client's own negligence or intentional misconduct.

Why It Matters: Many states follow the "American rule" where indemnity for a party's own negligence must be expressly stated. But if the clause is silent, a court may still impose joint and several liability.

Example: Your logistics firm damages goods during shipping, but the client failed to properly package the items. The clause requires you to indemnify the client for all losses, even though the client contributed 40% to the damage.

Action: Add a "proportionate fault" provision limiting your liability to the percentage of fault attributable to you, as determined by a trier of fact.

4. Indemnity for Third-Party Claims Only—But Broadly Defined

The Red Flag: The clause covers "any claim, demand, or cause of action" without specifying the relationship to the contract.

Why It Matters: Courts generally limit indemnity to third-party claims, but ambiguous language may be interpreted to include direct claims between the parties—circumventing the contract's liability cap.

Example: A client sues you for breach of contract. The indemnification clause is drafted broadly enough to cover this direct claim, potentially allowing the client to recover damages beyond the limitation of liability clause.

Action: Explicitly state that indemnification applies only to third-party claims, and confirm that the limitation of liability clause governs direct claims between the parties.

5. No "Material Breach" or "Final Determination" Trigger

The Red Flag: The indemnity obligation is triggered by "any alleged breach" or "any claim" without requiring a final adjudication or admission.

Why It Matters: This forces the indemnitor to pay defense costs for unproven allegations, and can be used as a leverage tool by the indemnitee.

Example: A client alleges your software infringes a patent. The clause requires you to indemnify immediately upon notice, even though the patent is later invalidated. You have already spent $100,000 on defense.

Action: Condition the duty to indemnify on a final judgment, binding arbitration award, or written settlement agreement. For the duty to defend, require a reasonable basis for the claim.

6. Indemnity for "Any and All Acts or Omissions" of the Indemnitor

The Red Flag: The clause covers losses arising from "any act or omission" of the indemnitor, including actions by subcontractors or affiliates.

Why It Matters: This creates vicarious liability for third parties you do not fully control. Under common law, you may be held responsible even if the subcontractor's negligence was unforeseeable.

Example: You hire a subcontractor to install equipment. The subcontractor damages the client's property. The broad indemnity clause makes you liable for the subcontractor's error, even though you exercised reasonable care in selection.

Action: Limit the indemnity to your own acts and those of your employees, and require the client to name any third parties they want covered.

7. No "Sole Negligence" or "Waiver of Subrogation" Limitation

The Red Flag: The clause does not exclude losses caused by the indemnitee's sole negligence or willful misconduct, and does not address subrogation rights.

Why It Matters: Without a sole negligence carve-out, you may indemnify the client for damages they alone caused. Without a waiver of subrogation, the client's insurer can sue you after paying a claim.

Example: A client's employee intentionally deletes your software configuration. The client claims the resulting downtime was caused by your "failure to back up." The indemnity clause does not exclude the client's willful misconduct, so you are on the hook.

Action: Add a carve-out for losses caused by the indemnitee's sole negligence or willful misconduct, and include a mutual waiver of subrogation.

Associate's Bottom Line: An indemnification clause is not boilerplate—it is a risk allocation device that can override the entire contract's liability structure. Use this checklist to flag issues early, and always escalate clauses with multiple red flags to a supervising partner. A well-negotiated indemnity protects your client's bottom line; a poorly reviewed one can become a litigation time bomb.