Indemnity and liability caps are two different clauses

Most people read “limitation of liability” and “indemnity” as one blob of scary legalese. They’re two different concepts, and mixing them up can cost you real money. We’re oversimplifying these complex concepts to help founders understand, not giving you legal advice.

A limitation of liability is about what you and the other party can owe each other. It caps the damages, or rules some out entirely, like incidental damages. Think of the coffee you bought while waiting around for the harm to happen. That’s the kind of thing these clauses disclaim.

Indemnity is about claims from other people. Say a stranger sues your customer because of something your product did. The indemnity clause decides whether you have to cover what your customer pays out.

Indemnity clauses usually start with a few verbs, and each one means something different. These words have been heavily litigated, so don’t treat them as filler.

Indemnify: I’ll cover your costs. Defend: I’ll pay for the lawyers and manage the fight, up front. Hold harmless: at the end, I make you whole for everything you lost because of the claim, even losses outside the claim itself.

Next, the clause says which claims it covers, and against whom: the company, its agents, affiliates, directors, officers, usually everybody. The starting point is typically “any claim related to the services.” That’s broad, and it’s where the negotiation happens. You narrow it to, say, only IP infringement, or only data breaches.

Here’s the trap. If your limitation of liability doesn’t carve out indemnity, there’s a strong argument your indemnity is capped at the same amount. That’s why customers push to carve it out. A common compromise is the “supercap”: indemnity gets its own, higher cap, separate from the general one.

But the best way to shrink your risk isn’t fighting over the cap. It’s the definition of the claim.

Say a customer wants uncapped IP indemnity. You can agree, but define the covered claim narrowly. Only patent, copyright, and trademark claims. And only where nothing the customer provided, and nothing an AI model generated, contributed in any way. What’s left is a sliver. The customer feels they got a real concession, and your actual exposure barely moved.

So remember: limitation of liability is about what you owe each other. Indemnity is about what you cover for outsiders. And when you negotiate, don’t just look at the dollar cap. Read how the claim is defined.

General information, not legal advice. Every contract is different. Level up with a human lawyer at Story.law, get Aegis Deal to optimize your enterprise customer contracting, and visit Developer.law, Designer.law, and Marketer.law to get our best vertical-specific logic baked into your customer contracts.