What Is An Indemnity Clause? (2026 Updated)

If you’re signing contracts for your business (or even just getting started), you’ve probably seen the word “indemnity” pop up and thought: what does that actually mean in real life?

An indemnity clause can look like a short paragraph tucked away near the end of an agreement, but it can have a big impact on who pays when something goes wrong. That’s why it’s worth understanding before you sign.

This 2026 update reflects how indemnity clauses are commonly drafted and negotiated in modern New Zealand commercial contracts, including online services, suppliers, and fast-moving business relationships.

What Is An Indemnity Clause?

An indemnity clause is a term in a contract where one party agrees to cover certain losses or costs suffered by the other party.

In plain English, an indemnity is often a “you’ll pay if X happens” promise. It’s a tool for shifting risk from one party to the other.

Indemnity clauses show up everywhere, including:

• supplier and distribution agreements
• service agreements (especially for consultants, agencies, and contractors)
• commercial leases
• software and online platform terms
• share sale and business sale agreements

Because indemnities can involve significant sums (including legal fees and third-party claims), they’re not “boilerplate” clauses you should ignore. Even a well-run business can face a claim due to a mistake, accident, or misunderstanding - and an indemnity can decide who wears the cost.

Indemnity vs Damages: What’s The Difference?

People sometimes assume an indemnity is the same as “damages” for breach of contract, but they’re not identical.

• Damages are usually paid when someone breaches the contract and the other party proves loss.
• An indemnity can create a more direct obligation to pay certain costs, even where proving loss is more complex (or where the claim comes from a third party).

In practice, indemnities can be drafted in ways that make recovery easier for the party being indemnified - which is why they’re often heavily negotiated.

Why Do Indemnity Clauses Matter For NZ Businesses?

If you’re a small business owner, it’s easy to focus on the commercial bits of a deal - price, timeframes, deliverables, renewal. But indemnities are about what happens when the deal doesn’t go smoothly.

An indemnity clause matters because it can:

• Allocate risk between the parties (who is responsible for what).
• Determine who pays legal costs if there’s a dispute or third-party claim.
• Impact insurance coverage (some indemnity promises go beyond what your policy covers).
• Increase your potential liability well beyond the contract value if the clause is broad.

To make it concrete, imagine you’re:

• a marketing agency publishing content for a client
• a trades business working on-site for a principal contractor
• an ecommerce store importing products and reselling them
• a SaaS provider onboarding customers onto your platform

In each scenario, an indemnity clause could be the difference between a manageable issue and a major bill.

This is also why indemnities often sit alongside limitation clauses - your contract might include a Limitation Of Liability clause, but if the indemnity is drafted too widely, it can effectively undo the protection you thought you had.

What Does An Indemnity Clause Usually Cover?

There’s no single “standard” indemnity clause. What it covers depends on the type of contract and the risks in that relationship.

That said, indemnities commonly cover losses connected to:

Third-Party Claims

A very common indemnity is where one party agrees to cover the other party if a third party makes a claim.

For example, a contractor might indemnify a client if a member of the public is injured due to the contractor’s negligence. Or a supplier may indemnify a reseller if a customer claims the product infringes someone else’s rights.

Intellectual Property (IP) Infringement

IP indemnities are particularly common in creative, tech, manufacturing, and branding arrangements.

For example, if you’re providing designs, software code, photography, or written content, a client may ask you to indemnify them if someone alleges the work infringes copyright or trade marks.

Where the IP position is complicated (for example, you’re reusing assets, using subcontractors, or building on open-source components), it’s worth having the IP ownership and responsibility clearly written into the agreement, not assumed. This is often dealt with in a tailored Service Agreement or contractor arrangement, depending on how you deliver the work.

Negligence Or Wrongful Acts

Some indemnities cover losses caused by a party’s negligence, breach of law, or misconduct.

Be careful here: an indemnity might be drafted so broadly that you’re covering losses even where you only contributed partly, or where the other party also acted poorly.

In some contracts, parties try to exclude liability for negligence or limit it, but this isn’t always straightforward. If your agreement includes language about excluding liability for negligence, it should be consistent with any indemnity promises - otherwise you can end up taking on risk you didn’t intend. (This comes up often in Excluding Liability For Negligence discussions.)

Regulatory And Compliance Breaches

Indemnities sometimes cover losses arising from a breach of law - for example privacy or marketing rules.

In New Zealand, if you collect and use customer personal information, you need to take your obligations under the Privacy Act 2020 seriously. If one party mishandles customer data and the other party suffers losses as a result, a contract may attempt to push those costs back via an indemnity.

That’s why privacy compliance often pairs with having a proper Privacy Policy and clear data handling obligations in your contracts.

Are Indemnity Clauses Enforceable In New Zealand?

Generally, indemnity clauses are enforceable in New Zealand if they are properly drafted and form part of a valid contract.

However, whether a particular indemnity will be enforced (and how far it extends) can depend on things like:

• the wording of the clause (courts focus heavily on plain meaning)
• the overall contract structure (how the indemnity fits with other risk clauses)
• the facts of what actually happened
• relevant statutes that might affect enforceability in certain contexts

What If The Indemnity Is Too Broad?

If an indemnity is drafted very broadly, it can create uncertainty and disputes about scope. In a negotiation, a broad indemnity is often a red flag because it can make you responsible for:

• losses not caused by you
• losses that are remote or unexpected
• losses that could have been avoided by the other party

A more balanced approach is usually to limit an indemnity to losses that arise from your breach, negligence, or specific defined responsibilities - and to exclude things outside your control.

How Indemnities Interact With Other Contract Terms

You should never read an indemnity clause in isolation. It usually interacts with:

• Limitation of liability (does the cap apply to indemnities?)
• Exclusion of consequential loss (does the indemnity override the exclusion?)
• Insurance obligations (are you required to hold specific cover?)
• Dispute resolution (how claims must be notified and managed)

If you’re agreeing to a big indemnity, it’s also worth checking whether you’re signing under your personal name or through a company structure. One reason founders set up a company is to help manage risk and separate personal and business liability - but the details matter, and sometimes documents include personal guarantees that cut across that protection.

If you’re still setting up, having the right governance documents (like a Company Constitution) can also help clarify how decisions are made and who can sign what.

How Do You Negotiate A Fair Indemnity Clause?

Indemnities are negotiable. Even when a bigger business hands you a “standard contract”, you can often propose amendments - and it’s usually better to raise these issues upfront rather than after something goes wrong.

Here are practical negotiation levers we often see in NZ commercial agreements.

1. Limit The Indemnity To What You Can Control

A good starting point is ensuring the indemnity is tied to events within your control, such as:

• your breach of the contract
• your negligence or wilful misconduct
• your infringement of IP (where you actually supplied the infringing material)

If the other party controls important parts of delivery (for example, they provide the specifications, materials, or customer instructions), you may want carve-outs so you’re not indemnifying them for their own inputs.

2. Add A Proportionate Liability Concept (Where Appropriate)

Some indemnities are drafted as “full indemnity” even if both parties contributed to the loss. Depending on the deal, you may want language that limits the indemnity to the extent you caused or contributed to the loss.

This can be especially important in projects where multiple suppliers are involved.

3. Include A Claim Notification And Control Process

If you’re indemnifying someone for third-party claims, you don’t want to find out after they’ve already admitted liability or agreed to a settlement.

Common protections include:

• a requirement that the other party notifies you promptly of a claim
• your right to control the defence (often with reasonable consultation)
• a requirement that they don’t settle without your consent

This can help you manage the risk, keep costs down, and ensure your insurer (if relevant) is involved in time.

4. Make Sure The Indemnity Matches Your Insurance

Many business owners assume “insurance will cover it” - but policies can have exclusions, limits, and conditions (and some risks, like certain contractual assumptions of liability, may not be covered).

Before you accept a broad indemnity, it’s worth asking:

• Do you have the right type of cover (e.g. professional indemnity, public liability, cyber)?
• Does your policy cover contractual indemnities, or only negligence-based liability?
• Is the contract requiring an insurance level you don’t currently hold?

If the contract is pushing you to take on risks you can’t insure, that’s a sign you should negotiate the clause (or reconsider the deal).

5. Check Consistency With Other Documents

Indemnities can quietly creep in across multiple documents - a master services agreement, a statement of work, onboarding terms, or purchase orders.

If you’re engaging workers or subcontractors, align indemnity obligations so you’re not exposed “in the middle”. For example, if your client contract makes you indemnify them for subcontractor conduct, your subcontractor agreement should include protections that flow down appropriately.

This is one reason it’s important to use properly drafted documents (rather than mixing templates), whether it’s an Employment Contract for staff or a tailored contractor agreement for external specialists.

Common Indemnity Clause Red Flags (And How To Spot Them)

Some indemnities are reasonable. Others can be a huge risk - especially for smaller businesses that don’t have a large balance sheet.

Here are common red flags we recommend watching for.

“Any Loss” Or “All Liability” With No Limit

Phrases like “any loss” and “all liability” can create a very broad obligation, potentially covering indirect costs like:

• lost profits
• business interruption
• reputational damage
• internal management time

These losses can quickly exceed the value of the contract.

Indemnity For The Other Party’s Negligence

If the clause requires you to indemnify the other party for losses caused by their negligence (or joint negligence), you may be carrying risk that should sit with them.

A more balanced clause might exclude losses caused by the indemnified party’s own acts or omissions.

Indemnity That Overrides Your Liability Cap

Many contracts say something like: “liability is capped at $X, but this cap doesn’t apply to indemnities.”

That may be commercially acceptable in certain deals, but you should treat it as a major negotiation point. If you’re relying on a liability cap to manage risk, you need to be sure the indemnity doesn’t blow a hole through that protection.

Indemnity For Things You Can’t Realistically Verify

Sometimes an indemnity asks you to promise that something is true or compliant when you can’t fully verify it (for example, guaranteeing that all third-party materials used in a complex supply chain are properly licensed).

In these cases, you may need to narrow the promise to what you actually know, or make it conditional on the other party providing correct information.

No Time Limit For Claims

An indemnity may operate for a long period - sometimes beyond the main term of the contract. That might be fine, but you should know what you’re agreeing to.

Where it makes commercial sense, you can negotiate a reasonable time limit for bringing indemnity claims, especially where the risk diminishes over time.

Key Takeaways

• An indemnity clause is a contract term where one party agrees to cover specific losses or costs suffered by the other party, often including third-party claims and legal fees.
• Indemnities matter because they can significantly shift risk and increase your exposure, sometimes well beyond the contract price or what your insurance covers.
• Common indemnities relate to third-party claims, IP infringement, negligence or wrongful acts, and regulatory breaches (including privacy-related issues).
• In New Zealand, indemnity clauses are generally enforceable, but their effect depends heavily on the exact wording and how the clause interacts with limitation of liability, exclusions, and insurance terms.
• You can often negotiate indemnities by limiting them to what you control, adding a fair claim process, aligning them with insurance, and ensuring they don’t override your liability cap unexpectedly.
• Broad phrases like “any loss”, indemnities for someone else’s negligence, and uncapped indemnities are common red flags worth getting advice on before you sign.

If you’d like help reviewing or negotiating an indemnity clause (or putting a contract in place that protects you properly from day one), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.