Most business transaction agreements include some form of indemnification. Simply, contractual indemnification is a risk shifting mechanism governing which party will have liability if a problem arises under the contract. A party agreeing to provide indemnification assumes future liability and should seek to narrow the scope of the provision to reflect its obligations under the contract.
By contrast, the indemnified party will seek an indemnification provision that provides the broadest protection from future liability. Despite the fact that it can greatly influence the economic result of a transaction, the indemnification provision is generally not addressed in preliminary negotiations between business people, but is instead left to the lawyers to hammer out.
6. Limitations, Baskets and Caps: The indemnifying party may seek a provision that there be a minimum dollar amount of losses suffered before the indemnification right is triggered. This threshold amount is commonly referred to as a “basket.” The basket can operate as either a true deductible such that losses are not paid until all claims exceed the basket amount or a “tipping basket” where all claims back to the first dollar are paid after the basket amount is exceeded.