Indemnification
Indemnification is a contractual remedy under which one party agrees to compensate another for specified losses arising from defined events, such as breaches of representations, warranties or covenants, assumed liabilities, excluded liabilities or specially identified risks.
Indemnification answers who bears a defined loss
Acquisition agreements divide risk before and after closing. A seller may retain responsibility for pre-closing taxes, excluded liabilities or breaches of seller representations. A buyer may indemnify the seller for assumed liabilities or breaches of buyer covenants.
The important question is not simply whether the agreement contains an indemnity. It is which losses are covered, which party bears them and what limitations apply.
General indemnification and special indemnities are different
A general indemnity often covers categories such as representation breaches or covenant breaches. A special indemnity targets a known issue—for example, a specific lawsuit, tax exposure or regulatory matter identified during diligence.
Known problems are often handled separately because RWI may exclude them and a general basket or cap may not reflect the negotiated economics of that risk.
Claim procedures matter
Indemnification provisions commonly require notice describing the claim, the legal or contractual basis, and the amount if known. Third-party claims can have separate defense and settlement procedures.
Missing a contractual deadline can affect recovery. A timely claim may also preserve rights after the stated survival period until the dispute is resolved.
The remedy can be limited by several layers
A claim can be subject to an individual de minimis threshold, an aggregate basket, a liability cap and a survival deadline. Insurance proceeds or other recoveries may reduce the loss. Some agreements require reasonable mitigation.
These layers should be modeled together. Reading any one limit in isolation can materially overstate or understate expected recovery.
Exclusive remedy language can reshape the risk
Many private acquisition agreements state that contractual indemnification is the exclusive post-closing remedy for ordinary breaches, while preserving exceptions such as fraud, intentional misconduct, specified ancillary agreements or equitable relief.
That language is economically important because it can replace broader common-law remedies with the negotiated contractual system.
Common mistakes
Assuming indemnification means unlimited seller liability The agreement can impose multiple thresholds, caps and deadlines.
Confusing indemnity with insurance An indemnity is a contractual obligation between parties. Insurance shifts selected risk to an insurer under a separate policy.
Ignoring the recovery source A claim against an escrow account, seller directly and an RWI policy can have very different collection risk.
Example
A buyer discovers after closing that the seller breached a tax representation and incurs a $600,000 covered loss. If the claim survives, is not excluded, satisfies the applicable basket and falls within the indemnity cap, the buyer may seek reimbursement under the agreement or another designated recovery source.
Example
A buyer discovers after closing that the seller breached a tax representation and incurs a $600,000 covered loss. If the claim survives, is not excluded, satisfies the applicable basket and falls within the indemnity cap, the buyer may seek reimbursement under the agreement or another designated recovery source.
Professional note
Indemnification should be read as an integrated article. A broad opening promise can be narrowed materially by definitions, claim deadlines, exclusive-remedy language, baskets, caps, insurance recoveries and special rules for fraud or fundamental representations.
Related terms
- Escrow
In an acquisition, escrow is an arrangement in which money, securities or other property is placed with an independent escrow agent and released according to agreed contractual conditions.
- Holdback
A holdback is a portion of acquisition consideration that is not paid immediately to the seller and is retained or set aside for specified post-closing obligations or claims.
- Representation and Warranty Insurance (RWI)
Representation and warranty insurance, or RWI, is transaction insurance designed to cover specified losses arising from breaches of representations and warranties in an acquisition agreement, subject to the policy’s terms, exclusions and retention.
- Representations and Warranties
Representations and warranties are contractual statements of fact or condition made by parties to an acquisition agreement about matters such as authority, ownership, financial statements, taxes, contracts, compliance and the business being sold.
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