Indemnity Basket

The basket filters ordinary claims

Private acquisition agreements often tolerate a negotiated amount of ordinary post-closing error before seller indemnification begins. This reduces administrative friction and prevents small claims from dominating the economics of the deal.

The basket typically applies to selected representation-and-warranty claims, not every contractual obligation.

Deductible and tipping baskets produce different economics

A deductible basket works like a deductible: the claimant bears the threshold and recovers only above it. A tipping basket or first-dollar basket generally allows recovery from dollar one after the threshold is crossed.

Using a $1 million threshold, a $1.4 million covered loss can therefore produce roughly $400,000 of recovery under a deductible structure or $1.4 million under a tipping structure, before caps and other rules.

De minimis thresholds can sit below the basket

Some agreements disregard individual claims below a stated amount when deciding whether the basket has been reached. A portfolio of very small claims may therefore never count.

That creates a two-stage filter: claim-size eligibility first, aggregate basket second.

Exceptions can bypass the basket

Fundamental representations, fraud, intentional misconduct, taxes or specifically identified indemnities may be carved out. The agreement can also create separate baskets for different risk categories.

A single headline basket percentage does not describe the full liability structure.

Basket and cap should be modeled together

The basket governs when recovery starts. The cap limits how much can ultimately be recovered for the covered category.

For acquisition analysis, the useful question is the claimant’s expected recovery corridor after applying de minimis thresholds, basket structure, cap, survival and available insurance.

Basket design affects negotiation incentives

The basket also changes behavior after closing. A very low threshold can encourage parties to pursue routine operational variances, while a high threshold can leave the buyer bearing a meaningful amount of ordinary breach risk.

The choice between deductible and tipping structures matters most near the threshold. With a $1 million basket and $1.1 million of eligible losses, a deductible structure can leave only $100,000 recoverable, while a first-dollar structure can make the full $1.1 million potentially recoverable before the cap.

That difference should be included when comparing competing bids, not treated as a drafting detail after price is agreed.

Common mistakes

Calling every basket a deductible Some baskets tip to first-dollar recovery once crossed.

Forgetting the de minimis layer Claims can be too small even to count toward the basket.

Applying the basket to fundamental claims automatically Many agreements expressly exclude specified fundamental or fraud claims.

Example

A purchase agreement has a $500,000 deductible basket. Covered ordinary representation losses total $800,000, so the recoverable amount is generally $300,000 before other limitations. If the same agreement used a first-dollar basket, crossing $500,000 could permit recovery of the full $800,000, subject to the actual contract language.

Always identify the basket type and what counts toward it. Some agreements also impose a per-claim de minimis amount, meaning smaller claims do not count toward the aggregate threshold at all.