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Definition of Indemnification

Indemnification is a legal term that refers to the obligation to compensate another party for harm or loss. This compensation is typically monetary and is used to cover damages, loss, or legal liability.

For example, in a business acquisition, the seller might agree to indemnify the buyer for any financial losses that occur due to breaches of the seller's representations and warranties. If the seller claimed that all its operations were legal, but after the transaction, it turns out that the company was involved in illegal activities, the buyer could face significant liabilities. In this case, the seller would be obligated to compensate the buyer.

Note that indemnification can also include the obligation to defend against third-party claims. For instance, if a commercial contract included an indemnification obligation in the event that the provider's deliverables breached the IP rights of a third party, the indemnification obligation for the provider would include providing a defense against a lawsuit filed by the third party.