- within Insurance, Consumer Protection and Privacy topic(s)
- with readers working within the Chemicals industries
This is Part 3 of my four-part series on indemnification clauses. In Parts 1 and 2, we covered what indemnification is, why it matters, and the red flags that show up most often in Washington contracts. Now we turn to the more advanced tools, the levers sophisticated parties use to control, limit, or allocate risk in a predictable way.
These concepts often appear when buying or selling a business, and they can dramatically change your exposure. This is also where a lawyer's experience makes the biggest difference, because these terms are rarely explained, often misunderstood, and almost always negotiable.
Baskets: When Indemnity Starts
A "basket" is a threshold that must be met before indemnification kicks in. Think of it as a deductible.
There are two main types:
- Tipping basket: once the threshold is met, the indemnifying party pays everything, including the first dollar
- True basket: the indemnifying party pays only the amount above the threshold
Without a basket, even small claims can trigger indemnity obligations, and legal fees, which is rarely what either party intends. A lawyer can help you negotiate a reasonable threshold that reflects the size and nature of the deal.
Caps: The Maximum You Can Be Forced to Pay
A "cap" limits the total amount one party can be required to indemnify.
Caps can be:
- A fixed dollar amount
- A percentage of the contract value
- Tied to insurance limits
Without a cap, your indemnity exposure is theoretically unlimited, something most businesses don't realize until it's too late.
A lawyer will typically:
- Ensure the cap reasonably applies to the risk of a claim
- Help understand which risks should be capped and which should be handled separately
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
