In business contracts, an agreement in which one party promises to compensate another for specified losses is called an indemnity.
An indemnity allocates particular financial risks between the contracting parties. The indemnifying party may have to reimburse covered losses, claims, liabilities, or expenses arising from events described in the agreement. Clauses often define procedures for notice, defense of third-party claims, exclusions, caps, and time limits.
Indemnity is related to, but not identical with, a warranty or guarantee. A warranty generally concerns the truth or quality of a contractual statement or product. A guarantee often involves a promise to answer for another party’s obligation or performance. The legal effect of each term depends on the wording and applicable law.
Businesses negotiate indemnities carefully because broad language can transfer substantial litigation or regulatory risk. Courts may also apply special rules to ambiguous, public-policy-sensitive, or liability-limiting provisions.