Most commercial agreements are negotiated on price, scope and term. The provisions that determine what the agreement costs if the work goes wrong sit further back in the document, are rarely redlined, and frequently contradict one another.
There are three of them: the indemnity, the limitation of liability, and the insurance requirements. Read together they allocate risk. Read separately, which is how they are usually drafted, they produce obligations a company cannot insure and caps that do not apply when it matters.
What an indemnity actually transfers
An indemnity is a promise to answer for someone else's loss. In a commercial contract it is nearly always aimed at third-party claims: a customer is sued by someone, and the vendor agrees to carry that exposure. It is not a general promise to make the other side whole for every disappointment under the agreement, although it is often drafted loosely enough to read that way.
Three verbs commonly appear together, and they are not synonyms.
- Indemnify is reimbursement. It operates after liability is established and amounts are paid.
- Hold harmless is usually read as a promise not to pursue the other party for the same loss.
- Defend is the expensive one. A duty to defend attaches when the claim is made, not when it is proven, and it covers claims that ultimately fail. A vendor can prevail on the merits and still have funded the entire defense.
Whether the indemnity reaches the indemnitee's own negligence is the question that decides most disputes. Courts generally require that to be stated clearly. A clause that is silent on it will usually be read not to cover it, which means the party that drafted it did not get what it thought it bought.
The cap and the carve-outs that remove it
A limitation of liability typically caps recoverable damages at fees paid over some preceding period and waives consequential, incidental and lost-profit damages. Standing alone that is a meaningful protection.
It rarely stands alone. The carve-outs that follow it routinely except indemnification obligations, breaches of confidentiality, data security incidents, intellectual property infringement and gross negligence. Each exception is defensible on its own. Taken together they often remove the cap from precisely the categories where large claims arise, leaving a limitation that applies to the disputes nobody litigates.
The question worth asking during negotiation is simple: after the carve-outs, what claim is actually capped? If the answer is a routine service failure and nothing else, the clause is doing less work than its length suggests.
Where the insurance stops matching
A contract that obligates a company to defend and indemnify its counterparty assumes that insurance will respond. Commercial general liability policies cover liability assumed under an insured contract, but that coverage has boundaries, and a contractual indemnity drafted more broadly than the policy leaves the difference uninsured and payable from operating cash.
Three requirements have to line up with the indemnity, and they are the ones most often left to whoever requests the certificate.
- Additional insured status. A certificate of insurance is evidence, not coverage. Additional insured status comes from an endorsement to the policy, and endorsement forms differ in whether they extend to completed operations and whether they cover ongoing work only.
- Primary and non-contributory. Without it, the counterparty's insurer can demand that the other policy contribute, which produces a coverage dispute at the worst moment.
- Waiver of subrogation. Without it, an insurer that pays can turn around and pursue the party the contract was meant to protect.
Reviewing these together is ten minutes of work before signature and a very different conversation afterwards.
One Florida provision worth knowing
Florida limits indemnification in construction contracts by statute. Section 725.06 provides that an indemnification provision in a contract for construction, alteration, repair or demolition is void and unenforceable unless the contract contains a monetary limitation on the indemnity that bears a reasonable commercial relationship to the contract and appears in the project specifications or bid documents where those exist. Where the indemnity runs to an owner from a party in privity with that owner, the limit cannot be less than one million dollars per occurrence unless the parties agree otherwise.
The consequence is unusual and worth stating plainly: an indemnity drafted without a monetary cap is not narrowed by the statute. It is void. A contractor that negotiated hard for broad indemnity protection and omitted the cap has no indemnity at all.
How this gets handled in practice
On an outside general counsel engagement these three provisions are read together rather than in sequence, and they are read against the certificates and endorsements actually on file rather than against what the contract requires. The common findings are an indemnity broader than the policy will answer for, a cap that every meaningful claim escapes, and additional insured endorsements that were requested but never issued.
Karina A. Vasquez reviews commercial agreements for South Florida companies on a flat monthly fee, with the scope stated in writing before the engagement begins.
Before the next contract is signed
If your agreements are being executed without review, the exposure is already on the books. Schedule a consultation and you will leave knowing where it sits.
Schedule a ConsultationThis article is provided for general informational purposes only and does not constitute legal advice, nor does reading it create an attorney-client relationship with KVasquez Law. Statutes, policy forms and case law change, and outcomes depend on the specific agreement and facts. Consult a qualified attorney about your circumstances before acting.