What is the meaning of indemnification? How does it differ from damages?

Indemnification (or indemnity) stems from the broader legal concept of making one party financially whole for losses suffered due to the actions (or inactions) of another.

In a contractual setting, an indemnification clause outlines when and how that compensation will occur. It defines the roles of the indemnifying party (who pays) and the indemnified party (who is protected), and sets boundaries on what types of claims or damages are covered.

It might seem similar to a remedies for breach clause (or ‘damages’), which details how a party will be compensated in case one of the contracting parties breaches the agreement. However, the application of the two is very different. 

A remedies clause kicks in when one party fails to do what they promised. An indemnification clause deals with third-party claims or losses that arise during the relationship (like IP infringement, data breaches, tax violations etc.). 

Therefore, you tend to find both boilerplate clauses in the same agreement. 

Types of indemnity and their limitations

Indemnity clauses can be one-sided or mutual. They may also include carve-outs (exclusions) such as if losses are caused by the indemnified party’s own negligence or bad faith. 

To prevent open-ended liability, indemnification clauses often include:

• Caps (maximum payout)
• Baskets (minimum loss thresholds)
• Condition qualifiers
• Notice procedures to trigger a claim

Many boilerplate clauses include the phrase “hold harmless,” which is to say that the indemnified party is protected against any claims. 

Why is it important? How does it affect your contracts?

Indemnification clauses are key risk-shifting tools. They allow parties to allocate financial responsibility in a way that reflects control, fault, or capacity to manage risk. For example, a software provider may agree to indemnify a client against third-party IP claims—because the provider is best positioned to prevent infringement.

These clauses are especially common in service agreements, licensing deals, construction contracts, and commercial leases. Depending on how they’re drafted, they can protect against breach of contract, negligence, bodily injury, product defects, regulatory fines, or other liabilities.

CLM tools like Docfield can review your contracts and summarise in a table view all agreements that don’t include an indemnity clause. This means you’ll never expose yourself or your organisation to unknown liability.