Indemnity Clauses: A Comprehensive Guide & Examples

An indemnity clause is a promise in a contract where one party (the indemnifier) agrees to cover specific losses, costs or claims the other party (the indemnified party) suffers if a particular thing goes wrong. In plain English: “If this happens, I’ll pay for it.” Indemnity clauses turn up in almost every Australian service agreement, contractor agreement, supply contract and NDA.

Here’s the uncomfortable bit. Most business owners sign indemnity clauses without reading them properly, usually because the contract came from a bigger client and it felt like there was no room to push back. There almost always is. And the wording in that one paragraph can decide whether a bad day at work costs you nothing or costs you your business.

What is an indemnity clause, in plain English?

An indemnity clause shifts the cost of a specific risk from one party to the other. The party giving the indemnity (the indemnifier) promises to make the other party (the indemnified party) whole if a trigger event happens. Trigger events might be a breach of the contract, negligence, a third party suing, or an intellectual property (IP) infringement claim.

You won’t always see the word “indemnity”. Watch for phrases like “hold harmless”, “make good”, “defend”, “keep indemnified” and “compensate for any loss”. They all do the same job.

Why does this matter more than an ordinary breach claim? Because a well-drafted indemnity can reach losses a normal damages claim won’t. Think full legal costs, settlement payments to a third party, and losses where nobody breached anything at all. That’s exactly why the party receiving it wants it, and why the party giving it should read every word.

Who is the indemnifier and who is the indemnified party?

Simple version: the indemnifier pays and the indemnified party gets paid. Before you do anything else, work out which one you are in each clause, because many contracts contain several indemnities running in different directions.

Indemnity vs limitation of liability vs guarantee vs insurance

Most founders assume these clauses are interchangeable. They aren’t, and mixing them up is how people end up with unlimited exposure they thought was capped.

Clause	What it does	Who it protects	Watch out for
Indemnity clause	Makes one party pay for specified losses or claims the other suffers	The party receiving the indemnity	Broad triggers and wording that sits outside the liability cap
Limitation of liability	Caps or excludes what a party has to pay	The party whose liability is limited	Carve-outs that quietly exclude indemnities from the cap
Guarantee	A third party promises to answer for someone else’s obligations if they don’t perform	The creditor (for example, a landlord or lender)	Personal guarantees from directors that survive the company
Insurance	An insurer pays covered losses in exchange for a premium	The policyholder	Exclusions for liability you take on by contract

Watch the gap between the first two rows. That’s where the trap sits. If your indemnity says it applies “despite any other clause”, it can sit outside your liability cap entirely. Read the limitation of liability clause and the indemnity side by side, every time. For a deeper look at the third row, see our guide to guarantees and indemnities.

Which type of indemnity clause are you being asked to sign?

Forget the label and look at the scope. Ask yourself one question: does this clause make me pay for things I control, or for things I don’t? Here’s how the common types stack up.

Bare (broad) indemnity

A bare indemnity covers “any loss arising out of or in connection with” the contract. No carve-outs, no cap, no link to fault. If the other party’s own staff cause the problem, a bare indemnity can still leave you paying.

Our view: never give a bare indemnity without at least a carve-out for the other party’s own fault. Receiving one is great. Giving one is how a $5,000 job becomes a six-figure problem.

Proportionate indemnity

A proportionate indemnity covers loss only “to the extent” your acts or omissions caused it. If the customer was 40% to blame, your indemnity shrinks by 40%. This is the fairest default for most small business service work, and it’s the first change we’d ask for when marking up a broad clause.

Third-party claims indemnity

Here you only pay when someone outside the contract (a customer, a member of the public, a rights holder) makes a claim. It’s narrower than a bare indemnity because it doesn’t cover the other party’s own direct losses. IP infringement indemnities in software and creative work almost always take this form.

Mutual indemnity

Each party indemnifies the other for its own breach or negligence. In practice, asking for a mutual indemnity is the single most common and most successful pushback in small business negotiations. It’s hard for the other side to argue that you should wear their mistakes but they shouldn’t wear yours.

Indemnity clause examples you can adapt

These examples are simplified to show how the moving parts fit together. They aren’t templates. Your clause needs to match your contract’s definitions, your liability cap and your insurance.

Example 1: The one-sided clause you’ll often be handed

The Contractor indemnifies the Client against all loss, cost, damage and liability of any kind arising out of or incidental to this Agreement or the Services.

What’s wrong with it: “arising out of or incidental to” catches almost everything, including losses the Client causes itself. There’s no cap, no claims process and no carve-out.

Example 2: The same clause, rewritten fairly

The Contractor indemnifies the Client against Loss the Client suffers to the extent that Loss is caused by the Contractor’s breach of this Agreement or negligent act or omission, except to the extent the Loss is caused or contributed to by the Client or its personnel. This indemnity is subject to clause [liability cap].

This version is tied to fault, it reduces for the Client’s contribution, and it sits inside the cap. Most reasonable counterparties will accept this version.

Example 3: A mutual indemnity for breach and negligence

Each party indemnifies the other against Loss arising from any breach of this Agreement, or any negligent or wilful act or omission, by the indemnifying party or its personnel, reduced to the extent the other party contributed to that Loss.

Both sides carry their own risk here. This is the version our lawyers most often recommend when a client asks for “something fair” in a service or contractor relationship.

Example 4: A third-party IP indemnity with carve-outs

The Supplier indemnifies the Customer against any third party claim that the Deliverables infringe that third party’s intellectual property rights. This indemnity does not apply to the extent the claim arises from materials supplied by the Customer, or changes to the Deliverables not made or approved by the Supplier.

Here the supplier covers what it controls (its own work) and not what it doesn’t (the customer’s logos, content or later edits).

Example 5: The claims process most small businesses forget

The indemnified party must notify the indemnifier promptly of any claim, take reasonable steps to mitigate its Loss, and allow the indemnifier to conduct the defence and any settlement of the claim, acting reasonably and keeping the indemnified party informed.

Skip this and the other side can run up legal fees, settle on terms you’d never accept, and send you the bill.

How indemnity clauses work in different agreements

Identical wording behaves differently depending on the contract it sits in. Here’s where the wording changes, and where people get caught.

Service agreements and master services agreements

This is where most indemnity fights happen. The client wants cover for anything your work touches. You want cover limited to your own breach and negligence. If you’re drafting from scratch, start with a services agreement template so the indemnity, liability cap and insurance clauses already talk to each other. For ongoing work under separate statements of work, a master services agreement keeps one indemnity regime across every job.

Non-disclosure agreements (NDAs)

NDA indemnities cover loss caused by leaking confidential information. Here’s the part most people miss: an NDA without an indemnity isn’t toothless. You can still sue for breach and seek an injunction. An indemnity mainly helps you recover legal costs and third-party losses (say, a client sues you because your contractor leaked their data). If you share information both ways, use a mutual NDA so the indemnity runs in both directions.

Employment contracts

Plenty of employers try to add a clause making employees indemnify the business for their mistakes. In New South Wales that mostly won’t work. Under the Employees Liability Act 1991 (NSW), an employer that’s liable for an employee’s negligence generally can’t recover that loss from the employee, except in cases of serious and wilful misconduct or conduct outside the job. South Australia and the Northern Territory have similar protections.

Far more useful is the reverse direction: the employer indemnifies the employee (or a director) for legal costs arising from doing their job properly. For directors and officers, that usually sits in a separate deed rather than the employment contract.

Contractor and subcontractor agreements

Contractors are where one-sided indemnities hurt most, because the contractor is often a sole trader with far less insurance than the business engaging them. If you’re the business, a fair contractor agreement with a proportionate indemnity is easier to get signed and more likely to hold up. If you’re the contractor, the rewrite in Example 2 is your friend.

Sale and supply contracts

Suppliers indemnify buyers for defective goods and for third-party claims (a customer injured by a faulty product, for example). Remember that consumer guarantees under the Australian Consumer Law apply regardless of what your contract says. An indemnity can add to those rights but can’t cut them down.

Are indemnity clauses enforceable in Australia?

Mostly, yes. Courts enforce clearly drafted indemnities. But “clearly drafted” is doing a lot of work in that sentence, and there are five limits worth knowing.

1. Courts read indemnities narrowly. The High Court in Andar Transport Pty Ltd v Brambles Ltd (2004) confirmed that indemnities are construed strictly in favour of the party giving them. If the wording is ambiguous, the indemnifier usually wins.

2. Your own negligence needs clear words. If you want someone to indemnify you for losses you caused yourself, the clause has to say so plainly. A vague “any loss” clause won’t be read that way by default.

3. Unfair contract terms now carry penalties. Since 9 November 2023, proposing, using or relying on an unfair term in a standard form contract with a consumer or small business is illegal, not just void. Each unfair term can be a separate contravention. A small business here means one with fewer than 100 employees or turnover under $10 million. A one-sided indemnity in your standard terms is exactly the kind of clause regulators look at.

4. Consumer guarantees can’t be contracted out of. If you deal with consumers, any indemnity has to sit alongside their statutory rights, not override them.

5. Proportionate liability laws can change the maths. Each state’s civil liability legislation can apportion certain claims by fault. Some states let you contract out of this; Queensland doesn’t. If proportionate liability matters to your deal, say so expressly in the contract.

Will your insurance cover an indemnity clause?

Often, no. And this is the question we see come up most in consultations.

Most public liability and professional indemnity policies contain a “contractually assumed liability” exclusion. The insurer covers what the law would make you pay anyway. It doesn’t cover extra liability you volunteered to take on by signing a broad indemnity. So the wider your indemnity, the bigger the gap between what you promised and what your policy will pay.

Before you sign, send the indemnity and liability clauses to your broker and ask one direct question in writing: “Will my policy respond to this clause?” Our guide to indemnities and insurance explains how the two fit together.

What we see in Lawpath consultations

Lawpath lawyers review indemnity clauses every week, across health practices, IT providers, recruiters, creative agencies and trades. These are the patterns that come up again and again.

The bigger party hands you a one-sided indemnity. Aged care facilities, clinic groups, agencies and enterprise customers regularly send contracts where only the small business indemnifies, for “any loss”. Our lawyers’ standard fix is a mutual indemnity limited to direct loss caused by each party’s own breach or negligence. It gets accepted far more often than business owners expect.

There’s an indemnity but no liability cap. A consistent pattern in the contracts we review is a broad indemnity sitting in a document with no limitation of liability clause at all. That combination leaves you exposed to uncapped loss, including indirect and consequential loss. Fix the cap first, then the indemnity.

The insurance doesn’t match the contract. Business owners often check their policy covers their work, but not whether it covers the contract. When the indemnity goes further than the law would, the contractually assumed liability exclusion kicks in and the gap is yours to fund.

Narrowing too far can backfire when you’re the one receiving it. When a contractor asks to limit your indemnity to “professional negligence only” or to cap it at their insurance limit, our lawyers often advise holding firm on a mutual, breach-based indemnity instead. Negligence is a higher bar to prove than breach, so that change quietly weakens your protection.

Consumer-facing forms overreach. Intake forms, booking terms and waivers for consumers regularly include indemnities that try to override statutory rights. Our lawyers add wording confirming the indemnity is subject to the Australian Consumer Law, which makes the rest of the clause far more defensible.

AI-drafted clauses need a human check. More business owners now arrive with an indemnity they’ve drafted using AI. Often it’s a sensible starting point. The common issue is scope creep: clauses that carve out third-party vendor risk poorly, or bespoke wording negotiated for one big client that then gets copied into every future contract. Keep negotiated wording for that deal, and keep your template clean.

How to negotiate an indemnity clause, step by step

You don’t need to win every point. You need the risk to sit with whoever controls it. Here’s the order we’d tackle it in.

1. Work out which direction each indemnity runs. Highlight every clause where you’re the indemnifier. That’s your exposure list.
2. Ask for it to be mutual. It’s the easiest request to justify, and most counterparties agree.
3. Tie the trigger to fault. Replace “arising out of or in connection with” with “to the extent caused by” your breach or negligence.
4. Add a carve-out for their contribution. The indemnity should reduce to the extent the other party caused or contributed to the loss.
5. Bring it under the cap. Make the indemnity “subject to” the limitation of liability clause, with any uncapped exceptions (such as IP infringement or personal injury) listed specifically.
6. Exclude indirect and consequential loss. Lost profits and lost opportunities are hard to insure and hard to predict.
7. Add a claims process. Prompt notice, a duty to mitigate, and your right to run the defence.
8. Check it against your insurance. Get your broker’s answer in writing before you sign.

If the other side refuses every single change, treat that as a warning sign about the relationship itself.

Checklist: before you sign an indemnity clause

• Do I know which clauses make me the indemnifier?
• Is the trigger tied to my breach or negligence, or to “anything connected with” the contract?
• Does the indemnity reduce for the other party’s own fault?
• Is it subject to the liability cap?
• Are indirect and consequential losses excluded?
• Is there a notice, mitigation and conduct-of-claims process?
• Has my broker confirmed my policy will respond?
• If it’s a standard form contract with a small business or consumer, would it survive an unfair contract terms review?

If you’re the one who needs protection (for example, you’re relying on a third party to cover a specific risk), a standalone deed of indemnity can be cleaner than burying the promise in a longer contract.

Indemnity clause FAQs

What is an indemnity clause in simple terms?

It’s a promise in a contract that one party will cover specific losses or claims the other party suffers if a particular event happens. For example, a contractor promising to cover a client’s legal costs if the contractor’s work infringes someone else’s copyright.

What’s the difference between an indemnity clause and a liability clause?

An indemnity clause makes you pay for certain losses. A limitation of liability clause caps or excludes what you pay. They should work together. If your indemnity sits outside the cap, you can have unlimited exposure even though the contract “has a cap”.

Are indemnity clauses enforceable in Australia?

Yes, if they’re clearly drafted. Courts read them narrowly in favour of the party giving the indemnity, need clear words before covering someone’s own negligence, and can strike out one-sided indemnities in standard form small business or consumer contracts under the unfair contract terms laws.

Can I refuse to sign an indemnity clause?

You can refuse or, more usefully, negotiate it. Most counterparties will accept a mutual indemnity tied to each party’s own breach or negligence and subject to a liability cap. Removing the clause entirely is harder than reshaping it.

Should an indemnity clause be mutual?

In most service, contractor and supply relationships, yes. A mutual indemnity means each party carries the cost of its own mistakes. It’s the most common fair outcome in the contracts our lawyers review.

Will my insurance cover an indemnity I’ve agreed to?

Not always. Many policies exclude liability you’ve taken on by contract beyond what the law would impose anyway. Send the indemnity and liability clauses to your broker and get written confirmation before you sign.

Can an employer make an employee indemnify the business?

In New South Wales, generally not for the employee’s negligence. The Employees Liability Act 1991 (NSW) stops employers recovering that loss from employees, except for serious and wilful misconduct. South Australia and the Northern Territory have similar rules.

Does an NDA need an indemnity clause?

Not always. You can sue for breach of an NDA and seek an injunction without one. An indemnity helps you recover legal costs and third-party losses, so it’s worth including when the information is valuable or shared with contractors.

What does “hold harmless” mean in a contract?

“Hold harmless” means the indemnifier promises to protect the other party from loss or claims. In Australian contracts it’s usually treated the same as an indemnity, so read it with the same care.

What is the difference between an indemnity and a guarantee?

A guarantee is a promise to answer for someone else’s obligation if they fail to perform. An indemnity is a primary promise to cover a loss, whether or not anyone else defaults. Guarantees usually involve three parties; indemnities can involve just two.

You don’t have to get this perfect on your own

If you’ve signed indemnity clauses before without reading them closely, you’re in good company. Most business owners have. Don’t panic about past contracts. Check the next one before you sign, and learn the handful of words that make all the difference.

Send your contract to a Lawpath lawyer and you’ll get a fixed-price quote to review the indemnity and liability clauses, plus clear advice on exactly what to push back on. Get your indemnity clause reviewed by a lawyer today.