If your business works with vendors, suppliers, subcontractors, or other third parties, one legal concept should never be an afterthought: indemnity.
Whether you're in construction, distribution, retail, or tech—chances are your business depends on others to deliver goods or services. And when something goes wrong, the question becomes: Who's responsible?
In this blog post, we'll break down what indemnity means in plain language, how it works in real business contracts, and what you can do today to better protect your company.
What Is an Indemnity Clause in a Business Contract?
An indemnity clause is a provision in a contract where one party agrees to cover losses or damages incurred by the other.
In simpler terms: it's a legal promise that says "If someone sues you because of something I did, I'll take care of it."
Indemnity is often triggered when:
- A supplier delivers a defective product
- A subcontractor causes damage or injury on a job site
- A vendor violates intellectual property rights
- A third party files a lawsuit involving multiple players in a business chain
Why Is Indemnity Important When You Work With Contractors and Vendors?
When something goes wrong in a chain of service providers, lawsuits can quickly spread. Even if your business didn't cause the problem, you could be named in the lawsuit.
Real-world example:
Let's say you're a general contractor on a construction project, and a subcontractor improperly installs electrical wiring. If the building suffers fire damage, the property owner might sue everyone involved—regardless of who was truly at fault.
This is where a well-drafted indemnity clause in your subcontractor agreement could protect you from covering costs that aren't yours.
Who Should Bear the Risk? Vendor vs. Supplier vs. Contractor
When reviewing or drafting contracts, one of the key decisions is which party should assume which risks. Generally:
- The party closest to the risk (the one doing the work or providing the goods) should indemnify others.
- Downstream parties (like contractors hiring subcontractors, or distributors using third-party vendors) should require indemnity protection in their agreements.
If your contracts don't clearly allocate risk, you may find yourself paying for another party's mistakes.
What Does a Typical Indemnity Clause Look Like?
Here's a simplified version of an indemnity clause you might find in a contract:
"Vendor shall indemnify, defend, and hold harmless Company from and against any and all claims, liabilities, damages, losses, and expenses (including reasonable attorneys' fees) arising out of or resulting from Vendor's performance of the services."
The strength of this clause depends on:
- The scope of indemnity (is it limited to certain claims or broad?)
- Whether it includes the duty to defend, which means paying for legal costs upfront
- Whether it's mutual (both parties indemnify each other) or one-sided
How to Enforce an Indemnity Clause If a Dispute Arises
Even with a signed contract, enforcing an indemnity provision can be complicated—especially when the other party refuses to acknowledge their responsibility.
Here's what enforcement often looks like:
- Notice: You provide written notice to the indemnifying party that a claim has been made and demand indemnification.
- Legal Analysis: Your attorney determines whether the claim falls within the scope of the indemnity provision.
- Defense or Reimbursement: Depending on the clause, the other party either covers your defense costs or reimburses you after the fact.
- Litigation (if needed): If the indemnifying party refuses to honor the clause, your attorney may need to file suit to compel them to pay.
Common Mistakes in Indemnity Provisions
If you're not careful, the indemnity language in your contract may end up offering you little or no protection. Here are some of the most common issues we see:
- Overly Vague Language: "Party A will indemnify Party B"... but for what?
- Missing Duty to Defend: Without this, you may
have to front legal fees on your own.
No Reference to Third-Party Claims: Indemnity should clearly apply to lawsuits from outside parties, not just internal contract breaches.
Failure to Match Insurance Coverage: If your indemnification expectations don't line up with the vendor's insurance, you're left exposed.
What Type of Insurance Should You Require from Vendors?
Indemnity clauses are only as strong as the party's ability to pay. That's why it's smart to require specific insurance coverage in vendor contracts that aligns with your indemnity expectations.
Here are common coverages to consider:
- General liability insurance
- Professional liability insurance (E&O)
- Workers' compensation
- Commercial auto insurance
- Umbrella or excess liability coverage
Your contracts should also require proof of insurance and make your company an additional insured on their policies when possible.
Can You Limit Your Business's Indemnity Exposure?
Absolutely. Just as you want protection, other businesses may ask you to indemnify them. Before you agree, review those clauses carefully. A broad indemnity provision could leave your business on the hook for risks it didn't create.
A few ways to limit your exposure:
- Include caps on liability (e.g., not to exceed the contract value)
- Exclude indemnity for the other party's negligence
- Require mutual indemnity provisions
- Narrow the clause to only cover specific claims or losses
Working with an attorney who understands commercial litigation and contract risk is critical in these situations.
Final Thoughts: Protecting Your Business Starts With Your Contracts
At Ayala Law, we've seen businesses blindsided by liabilities that could have been avoided with better contract language. Whether you're a contractor hiring subs, a distributor working with manufacturers, or a business owner signing vendor agreements—you need indemnity protection tailored to your operations.
We help clients:
- Draft and review commercial agreements
- Enforce indemnity provisions in court
- Advise on vendor and subcontractor risk management
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
