Quick summary

Indemnity and hold‑harmless clauses shift legal and financial exposure. Lenders often use them to protect against third‑party claims, contractual breaches, or costs tied to the borrower’s business or property. For borrowers, the difference between limited, mutual, and unlimited indemnities can mean the difference between manageable risk and open-ended liability.

Background

Historically rooted in contract and commercial law, indemnity and hold‑harmless provisions began in construction and transport contracts and migrated into lending as lenders sought broader protections. Today these clauses appear in commercial, consumer, and real‑estate loan documents; their scope varies by industry and state law (see Nolo and Investopedia for legal primers).

How these clauses work in loans

  • Typical language covers “claims, losses, damages, liabilities, and expenses” and often includes attorney fees.
  • An indemnity may require the borrower to reimburse the lender for costs arising from the borrower’s use of collateral, environmental issues, lawsuits by third parties, or breaches of representation and warranties.
  • A hold‑harmless clause usually states that one party will not hold the other liable for certain harms.

Both can be broad (covering the indemnitee’s own negligence) or narrow (limited to the indemnitee’s third‑party claims or specific events).

In my practice advising small business and real‑estate borrowers, I routinely see overly broad indemnities that:

  • obligate borrowers to pay defense costs before fault is established, and
  • lack caps or time limits, exposing borrowers to indefinite liability.

Real‑world examples

  • A tenant’s slip‑and‑fall near loan collateral leads a lender to seek reimbursement under an indemnity clause for legal defense and settlement costs.
  • Environmental contamination discovered after closing can trigger indemnity obligations for cleanup costs if the loan document ties environmental liability to the borrower.

Who is affected

All borrowers can be affected, but small businesses, commercial real‑estate investors, contractors, and franchisees are most at risk because their operations have higher exposure to third‑party claims. Borrowers who sign without counsel are especially vulnerable.

Practical strategies for borrowers

  1. Read the clause word‑for‑word: note who it protects, what events are covered, and whether negligence (including the lender’s) is included.
  2. Limit scope: negotiate to exclude the lender’s own negligence or willful misconduct and narrow covered events to specific, foreseeable risks.
  3. Add caps and time limits: set monetary caps, impose time windows for claims, or require exhaustion of insurance before indemnity obligations kick in.
  4. Carve out defense‑cost timing: require that the lender seek reimbursement only after judgment or settlement, or that the lender’s right to immediate defense costs be limited.
  5. Match insurance to exposure: confirm your liability insurance covers the risks the clause creates; ask for the lender to be named as an additional insured only where appropriate.
  6. Mutuality: where possible, make indemnities mutual so both parties bear similar risk for the same categories of claims.

For negotiation playbooks and clause checklists, see our guide on Key clauses in a loan agreement every borrower should read.

Common mistakes borrowers make

  • Accepting broad, uncapped indemnities without legal review.
  • Assuming insurance will automatically cover indemnity obligations—policies often exclude contractual liabilities unless endorsed.
  • Not negotiating carve‑outs for the lender’s negligence or failing to require proof of loss before payment.

See also our article on modifying loan terms without breaking your loan covenant for tips on negotiating changes post‑closing.

Quick checklist before signing

  • Who is the indemnitee?
  • What types of claims are covered?
  • Is the borrower responsible for the lender’s negligence?
  • Are costs (including attorney fees) capped or time‑limited?
  • Will insurance respond to the obligation?

Short FAQs

  • Can indemnity clauses be enforced? Yes—if they’re clear, comply with state law, and aren’t barred by public policy; enforcement varies by jurisdiction (see Nolo).
  • Will insurance always cover indemnity obligations? Not always—standard policies may exclude contractual liability; confirm with your insurer or broker.

Professional disclaimer

This article is educational and not legal advice. For contract‑specific guidance, consult an attorney licensed in your state. In my practice I recommend legal review of any loan clause that could create open‑ended financial exposure.

Authoritative sources

(Last reviewed 2025.)