Summary:
Broad indemnification clauses can shift massive liability to small businesses. One clause can leave you paying for someone else’s mistakes. Review and narrow the language before signing to protect your company.
Small businesses sign contracts every day. When juggling vendor agreements, leases, partnerships, or subcontractor deals, many rush by skimming through the fine print. One of the most dangerous pieces of that fine print is often the indemnification clause. It looks harmless, maybe just a paragraph or two buried near the end, but in the wrong hands, it can transfer staggering financial risk straight to your business.
What Indemnification Really Means
An indemnification clause is a promise to cover another party’s losses, damages, or lawsuits tied to the contract. It sounds cooperative, but it can shift more liability than you realize.
Take a subcontractor who agrees to indemnify a general contractor for “any and all claims arising out of the project.” If an accident happens because of the general contractor’s oversight, the subcontractor might still pay for medical bills, legal defense, and settlements. Cases like this have bankrupted small operations overnight, but thankfully, they’re often avoidable.
How These Clauses Drain a Business
Indemnification turns a legal issue into a financial one. When a claim hits, the indemnifying party can be forced to fund the other side’s defense and damages before any fault is decided. Insurance doesn’t always save you. Many liability policies exclude contractual indemnification.
The pattern is familiar: a demand letter arrives, lawyers get involved, and the small business starts paying out of pocket just to contain the situation. Even if you win later, the legal fees and lost time can wipe out the profit from several good years. Why not catch it before dispute is even an option?
How to Protect Your Business
If you don’t already have a partnership with an attorney, establish one as soon as possible. Danger lies in the details, and your attorney is trained to look out for contract wording that puts you at a disadvantage. The wrong phrase could make your liability unlimited or force you to pay legal costs even if you’re blameless.
Reasonable clauses tie responsibility to your own negligence or breach. They exclude claims caused by the other party’s conduct. When language stretches beyond that, it’s time to push back.
Before signing, review the clause with your attorney or insurance broker to ensure your coverage matches the risk. If it doesn’t, ask for changes.
Negotiate for mutual indemnification, where each party covers its own actions. If that’s off the table, narrow the language to claims “to the extent caused by” your work. You can also request a financial cap, like limiting liability to the contract amount, or confirm the other side’s insurance will respond first.
As a rule of thumb, if the clause could make you liable for something completely outside your control, it’s too broad.
Don’t Accept “Standard” at Face Value
Larger partners often insist their contracts use “standard” wording. That doesn’t mean it protects you. Every line in a contract allocates risk, and indemnification clauses often push it downhill to the smallest party.
A short review before signing can save an enormous cost later. Think of contract review not as red tape but as risk management. It’s time spent up front that keeps your business solvent when things go awry.
Work with a Team That Has Your Best Interest in Mind
An indemnification clause can quietly put your company on the hook for someone else’s mistakes. The best defense is clear language, matched coverage, and a willingness to negotiate.
If you want professional help reviewing contracts or limiting liability before you sign, the team at Melchert Hubert Sjodin, PLLP, can assist. Call (952) 442-7700 to schedule a consultation and keep your agreements working for your business, not against it.
