What follows are our general observations and opinions about indemnification clauses in California commercial contracts. This is not legal advice, it is not a definitive statement of California law, and every agreement depends on its own terms.
An indemnity clause is a promise to cover someone else’s losses. It is usually the shortest heavily negotiated provision in a commercial agreement, and in our experience it is the one clients sign with the least understanding of what they have taken on. The clause is doing something quite different from the rest of the contract: rather than defining what each side must deliver, it decides who pays when something goes wrong with a third party.
The practical point we make first is that indemnity can be far larger than the deal. A vendor on a modest annual contract can end up indemnifying a customer for a claim many multiples of what the contract was ever worth. Unless the clause is capped or carved into the liability limits, that exposure is open-ended.
Three obligations hiding in one clause
Most clauses bundle together promises that behave very differently, and they are worth separating when you read one:
- Indemnify. Reimburse losses actually suffered. This is backward-looking and usually triggered once liability is established.
- Defend. Take on and pay for the defence of a claim from the outset — and our reading is that this duty can arise on a claim that is merely potentially covered, well before anyone knows whether it has merit. That makes the duty to defend considerably more expensive in practice than the duty to indemnify.
- Hold harmless. Often treated as synonymous with indemnify, though it is sometimes argued to go further and bar the beneficiary from being pursued at all.
If you are giving the indemnity, the duty to defend is the one to focus on. Legal fees accrue from the day a claim is filed regardless of outcome, and a defence obligation with no cap can outrun the entire commercial value of the relationship.
Scope: what triggers it
The trigger language decides almost everything. There is a large difference between indemnifying claims “arising out of” your negligence and indemnifying claims “arising out of or relating to” your performance. The second sweeps in claims where you did nothing wrong at all.
Our general suggestion when giving an indemnity is to tie it to your own fault — your negligence, your wilful misconduct, your breach of the agreement, your infringement of a third party’s intellectual property. When receiving one, you naturally want the broadest trigger available. Where the negotiation lands usually reflects bargaining power more than principle, but the drafting should at least be deliberate rather than accidental.
Indemnifying someone for their own negligence
This comes up constantly in construction, services and lease contexts. Our reading of California law is that an agreement can shift responsibility for a party’s own negligence, but that courts require the intent to do so to be expressed clearly rather than inferred from general words — and that for a party’s *active* negligence the standard of clarity is higher still.
There are also statutory limits worth knowing about. California restricts certain indemnity provisions in construction contracts, and Civil Code section 1668 addresses attempts to exempt a party from responsibility for fraud, wilful injury or violation of law. A clause drafted as though none of that exists may not do what its author assumed.
Procedure: the part nobody reads
The mechanics decide whether an indemnity is usable. We look for four things:
Notice — how quickly must a claim be reported, and does late notice forfeit the indemnity outright or only to the extent of actual prejudice? The second is much fairer and is worth asking for. Control of the defence — the indemnifying party is paying, so it usually wants to choose counsel and run the case, but the indemnified party has its own reputational and commercial interests. Settlement consent — can the indemnitor settle without agreement, including on terms that admit fault? Cooperation — a practical obligation to provide documents and witnesses.
An indemnity with no notice mechanism and no defence-control provision tends to produce a second dispute about the indemnity itself, on top of the underlying claim.
How it interacts with the liability cap
This is the single most consequential drafting question and the one most often left ambiguous. If the agreement caps liability at, say, fees paid in the preceding twelve months, does that cap apply to the indemnity?
Frequently the indemnity is carved out of the cap, which means the carefully negotiated limitation does not constrain the largest exposure in the contract. Sometimes that is the right commercial answer — an intellectual property indemnity that is capped at a small figure may be worth little to the recipient. But it should be a decision, not an accident. We also look at whether the insurance provisions actually match: an indemnity the insurance does not cover is a balance-sheet risk rather than a transferred one.
Practical suggestions
Read the indemnity, the limitation of liability and the insurance clause together — they only make sense as a set, and reviewing any one in isolation gives a misleading picture. Push for mutuality where the risks are genuinely mutual, and do not accept a one-way indemnity simply because it arrived that way in the other side’s template. And be realistic about counterparty substance: an uncapped indemnity from a company with no assets and no insurance is worth exactly nothing.
Talk to us
If you are being asked to give an indemnity and want to know what it actually exposes you to, or you want one drafted that will hold up, call us at (310) 556-9692. Contract review and drafting is transactional work, so we handle it on an hourly or flat-fee basis rather than on contingency, and we will give you a cost estimate before we start.
Related reading: our contract review and drafting resources, plus what a business purchase agreement actually does, what belongs in an LLC operating agreement, and commercial lease negotiation.
This article reflects our own general views and opinions and is offered for information only. It is not legal advice, it is not a definitive statement of California law, and reading it does not create an attorney-client relationship between you and our firm. If an indemnity provision affects an agreement you are signing, please speak with a lawyer about your particular contract.
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