Common Indemnity Clauses Borrowers Should Know

Why this matters for borrowers

Indemnity clauses are often short language in long loan documents, but they can create multi‑thousand (or million) dollar obligations if triggered. In my 15 years working with borrowers and lenders, I’ve seen carefully worded indemnities convert a manageable default into a long-lasting liability because the borrower didn’t spot a broad “hold harmless” provision or a duty to defend. This guide explains the common indemnity clauses you’ll see, how they work, red flags to spot, and practical strategies to limit your exposure.

Core types of indemnity clauses

Below are the most common indemnity clause types borrowers encounter in commercial and consumer loan agreements. I explain what each does, why lenders use them, and what borrowers should negotiate.

• General indemnity (broad form): Requires the borrower to cover losses the lender suffers because of the borrower’s actions, breaches, or omissions. This is the baseline protection lenders seek.

• Third‑party indemnity: Covers claims brought by outsiders (e.g., subcontractors, customers, regulators). Often used in construction and real‑estate finance to protect lenders from third‑party suits tied to the borrower’s project.

• Duty to defend: Requires the indemnifying party to pay for the other party’s legal defense costs immediately when a claim arises, regardless of fault. This is one of the most costly obligations for borrowers.

• Indemnity for breaches of representations & warranties: If a borrower’s statement in the loan documents proves false, the borrower indemnifies the lender for resulting losses.

• Tax and environmental indemnities: Specific carve‑outs where borrowers agree to cover tax liabilities or cleanup costs—common in asset sales, property finance, and corporate loans.

• Consequential damages and limitation clauses: Indemnities may include (or exclude) consequential damages, such as lost profits. Borrowers should seek to exclude these or cap recovery.

• Survival clauses: Specify which indemnities survive closing and for how long (e.g., reps survive for 18–36 months; environmental indemnities may be indefinite).

How these clauses work in practice

An indemnity clause typically has three elements:

1. Triggering event (what causes the indemnity),
2. Scope of losses covered (damages, fees, penalties, defense costs), and
3. Remedies/limits (caps, baskets/deductibles, time limits, and who controls defense).

Example from practice: I represented a small developer whose loan included a broad third‑party indemnity and an unconditional duty to defend. When a contractor filed a negligence claim related to site safety, the lender demanded the borrower pick up the lender’s legal fees immediately. The borrower had to borrow additional funds to meet those costs—precisely the sort of cash strain a borrower must anticipate if these clauses are broad.

Common red flags for borrowers

Watch for these language points that expand borrower liability:

• Unqualified “indemnify and hold harmless” language covering any and all claims, without carve‑outs for lender negligence.
• An unconditional duty to defend (rather than a duty to indemnify after fault is established).
• No caps or monetary limits on indemnity exposure.
• Indemnities that survive indefinitely without a sunset period.
• Broad indemnities covering consequential or punitive damages.
• Lender control of defense and settlement without borrower consent.

Practical negotiation points and clauses to seek

You can often narrow indemnities or shift some risk back to the lender. Useful negotiation tactics I employ or recommend to clients include:

• Carve out lender gross negligence or willful misconduct: Require the borrower to indemnify the lender except for losses caused by the lender’s gross negligence or willful misconduct.

• Limit the duty to defend: If the duty to defend remains, require that it only applies to claims for which the borrower is ultimately liable, or at least add a fee cap or requirement that the lender provide written notice and reasonable opportunity to cure.

• Add monetary caps and baskets: Propose a cap on indemnity liability (often tied to loan amount or equity) and a deductible or basket below which the borrower is not responsible.

• Define covered losses narrowly: Specify that indemnity covers direct losses, actual damages, reasonable defense fees, and not consequential or punitive damages unless caused by gross negligence.

• Shorten survival periods: Aim for defined survival windows (e.g., reps survive 12–24 months; tax and environmental indemnities may warrant longer or special rules) rather than indefinite survival.

• Require lender cooperation: Add an express cooperation clause that the lender must provide prompt notice of claims and allow the borrower to participate in defense and settlement decisions.

Insurance and risk mitigation

When negotiating indemnities, align them with insurance coverage. Common steps:

• Confirm your liability and commercial general liability (CGL) policies will respond to third‑party claims. If not, negotiate narrower indemnities or require the lender to seek recovery from its own insurer first.

• Add lender as an additional insured under certain policies where appropriate (but be cautious—being additional insured can expand insurer obligations and affect premiums).

• Consider professional liability, environmental liability, and builder’s risk policies for industry‑specific risks.

• Maintain adequate limits and obtain endorsements that match the indemnity exposure where possible.

Typical industry examples

• Construction financing: Lenders expect broad indemnities for claims arising from construction defects, site incidents, and subcontractor claims. Push to limit duration and scope where you can.

• Commercial real estate: Environmental indemnities can be long‑running and costly; borrowers should obtain phase I/II environmental studies and appropriate insurance or escrow funds.

• Small business lines and personal loans: Even consumer loans sometimes include indemnities for borrower misrepresentations or legal costs; read fine print and avoid blanket language.

Checklist for reviewing indemnity language (use before signing)

1. Identify the trigger events — are they reasonable and specific?
2. Confirm what losses are covered — defense costs, fines, indirect losses?
3. Look for duty to defend and who controls defense and settlement.
4. Check for caps, baskets, and deductibles; request limits if missing.
5. Note survival periods and carve‑outs for lender misconduct.
6. Ensure insurance will respond and consider adding the lender as additional insured only when necessary.
7. Get legal counsel and, if relevant, industry counsel (e.g., environmental or construction lawyers).

How this interacts with other loan terms

Indemnities often link to other provisions: representations & warranties, covenants, events of default, and remedies. For example, a rep breach may be an event of default and also trigger indemnity obligations. See our related guides on Practical Guide to Loan Covenants for Business Borrowers and Negotiating Waivers and Amendments in Business Loan Agreements for negotiating overlapping protections. If prepayment or repayment timing affects your ability to fund indemnity obligations, review Prepayment Clauses: What They Mean for Your Mortgage or Loan as well.

FAQs — concise answers

• Can a lender require a borrower to indemnify for the lender’s own negligence? Many lenders try, but borrowers should resist. At minimum, ask for an exception for lender gross negligence or willful misconduct.

• Are indemnities automatically enforceable? Generally yes in the U.S., but enforceability depends on state contract and public policy law. Courts may limit enforcement of overly broad or unconscionable indemnities.

• What’s the difference between indemnify and hold harmless? “Indemnify” obligates payment for loss; “hold harmless” is broader language asking one party to absolve the other from liability. Together they create strong protection for the indemnified party.

Where to get authoritative guidance

• Consumer Financial Protection Bureau (CFPB) provides borrower protection resources and guidance on fair lending practices (consumerfinance.gov).
• For legal interpretation, state case law and local counsel are key—consult a qualified contract attorney. Cornell’s Legal Information Institute and ABA resources are helpful starting points for legal concepts.

Final practical advice from my practice

Always review indemnity clauses early in negotiation, not at signature. Ask for specific, written carve‑outs and caps, align indemnities with your insurance, and get counsel that understands your industry—construction, real estate, and environmental indemnities are materially different. If the lender resists reasonable limits, quantify the potential worst‑case exposure and factor that into pricing or the decision to proceed.

Disclaimer

This article is educational and not legal advice. For contract drafting or dispute guidance, consult an attorney licensed in your state.

Authoritative sources and further reading

• Consumer Financial Protection Bureau (CFPB): https://www.consumerfinance.gov
• Cornell Law School, Legal Information Institute — Contract Law overview: https://www.law.cornell.edu/wex/contract