An indemnification clause in a contract represents an agreement by one party to compensate the other party for certain costs and expenses.
While the details of these clauses are highly variable, the basic idea is usually that the indemnifying party agrees to reimburse the indemnified party for any recoverable damages that arise from certain covered events. Examples of covered events include lawsuits, government actions, and other claims by third parties.
As part of an indemnity clause, it’s common to see an obligation for the indemnifying party to also defend the indemnified party against claims by a third-party or to pay for the defense of a claim or litigation. This can be a particularly important protection for a party that lacks the resources to defend itself against a lawsuit.
Note: The quintessential example of contractual indemnity is an insurance policy: the insurer agrees to reimburse the policyholder for damages caused by certain events.