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Under an indemnity, one party agrees to pay the other an agreed amount should a certain event occur during the contract.

The “events” covered by an indemnity are usually unexpected costs and expenses the indemnified party incurs while performing obligations under the contract, the benefits of which accrue to the indemnifying party: things like tax charges levied on a custodian relating to assets it holds for its clients. Without an indemnity, the party incurring these costs would just have to wear them. This would be a windfall for the benefiting party.

An indemnity thus creates a payment obligation under the contract where one would not otherwise exist. If the indemnified event occurs and the indemnifier doesn’t pay, the indemnifiee has an action in breach of contract. It can sue.

And that’s about it. An indemnity gives you a right to sue where, without it, you would not have one.

In any case, indemnities should not, ever, cover losses arising from breach of contract. Like, ever. Anyone who tells you anything different — and in this old salt’s long and grim experience, many people who should know far better will — is, for the time being, without limitation and notwithstanding anything to the contrary in the foregoing contained, a moron.

For two reasons:

Firstly, if the other guy has breached the contract, Q.E.D. you have a right of action under the contract. You don’t need an indemnity to give you a right to sue. This is self-evidently true.

Secondly, there are important limitations on one’s liability for breach of contract — questions of causation, remoteness of damage, foreseeability and proof of loss — developed over centuries in the Darwinian crucible of the common law — that are there for very good reasons, and about which the parties are certain to disagree vigorously. An indemnity is meant to be a pre-agreed amount, so is quite unsuitable for a contractual damages claim. There are those — as above, they are morons — who believe that overlaying the basic right to sue for breach with an indemnity will somehow subvert the need for adversarial inquiry into the breach. It won’t.