What does an indemnity clause in a contract accomplish?

An indemnity clause in a contract serves to require one party to compensate the other for specified damages or losses that may arise from the agreement. This clause is crucial in risk management as it helps to allocate risks between the parties involved. When included in a contract, the indemnity clause establishes a clear understanding that if one party incurs certain types of losses—often due to the actions or negligence of the other party—the indemnifying party is obligated to cover those losses. This provides security and reassurance to the parties, as it creates a financial safety net against potential liabilities that may not be directly associated with their actions.

By specifying the damages or losses that an indemnitor is responsible for, the clause helps to protect parties from unexpected financial burdens resulting from third-party claims or other specified liabilities. The effectiveness of an indemnity clause relies on its clear definition of liabilities and the conditions under which indemnification will occur. This understanding allows parties to assess their exposure to risk within the contract and make informed decisions during negotiations.