Indemnification
The contractual obligation to compensate the other party for losses arising from breaches of the agreement or from specified known risks.
Also called: Indemnity
Indemnity is the remedy machinery attached to the representations. It sets out who can claim, for what, within what period, and subject to what limits. The economic terms are the ones to read closely: the cap on total liability, the basket or deductible below which claims cannot be brought, whether the basket is a true deductible or a tipping basket that lets the whole amount be claimed once crossed, and whether escrow is the exclusive remedy.
Most agreements carve out certain matters from the general limits. Fraud is almost always excluded from any cap. Fundamental representations — title, authority, tax — commonly carry higher caps and longer survival. Specific known issues found in diligence are often handled by a special indemnity with its own terms rather than being priced into the general package.
From the seller's side, the objective is a package where the maximum realistic exposure is knowable and bounded: a defined cap, a defined period, and ideally a funded escrow that is the sole source of recovery.
Where sellers get caught
- A cap set at the full purchase price, which leaves you exposed to everything you were paid.
- No basket, so trivial claims are actionable.
- Special indemnities with unlimited duration attached to issues you could have fixed pre-sale.
Common questions
What is a basket?
A threshold of aggregate losses that must be reached before the buyer can claim. A deductible basket lets them recover only the excess; a tipping basket lets them recover from the first dollar once the threshold is crossed. The difference is worth negotiating.
Can indemnity claims exceed the escrow?
They can, unless the agreement makes the escrow the exclusive remedy. Getting that exclusivity is one of the more valuable seller protections.
Related terms
Representations and warranties
Statements of fact about the business made by the seller in the purchase agreement, which the buyer relies on and can claim against if untrue.
Escrow and holdback
A portion of the purchase price kept back at closing to cover claims that arise afterwards, released once the claim period passes.
Representations and warranties insurance
An insurance policy covering losses from breaches of the seller's representations, allowing a smaller escrow and a cleaner exit.
Asset sale
A transaction in which the buyer purchases specified assets and assumes specified liabilities, rather than buying the legal entity itself.
Guides that use this term
Where indemnification comes up in a real sale, and what it changes.
Last reviewed 2026-08-25. General information for business owners, not legal, tax, or financial advice — terms, thresholds, and tax treatment vary by jurisdiction and by deal.