Indemnity

Indemnities are common in contracts. A software supplier indemnifies a customer against claims of copyright infringement, a seller indemnifies a buyer against pre-sale tax liabilities, and an outsourcer indemnifies a client for data breaches. An indemnity differs from damages for breach, because the listed event triggers it, with or without a breach, and it often covers third-party claims and legal costs. Negotiation centres on scope, caps, carve-outs, notice rules, who controls the defence, and the duty to limit losses. First-party indemnities cover the protected party’s own loss, third-party indemnities cover claims made against it. Unlimited indemnities create heavy exposure for the giver. In insurance, the principle of indemnity means compensation restores the insured’s position without profit. Before accepting one, a recipient checks the giver's finances and insurance.

A retailer outsources its payment processing. The contract requires the processor to indemnify the retailer for card data breaches, covering notification costs, regulator fines where lawful and customer claims, up to a cap of ten times annual fees. After a breach, the retailer notifies the processor promptly and lets it control the defence of customer claims. The processor’s insurer pays most of the cost.