Indemnity vs Breach of Contract Claim in a SaaS Terms of Service?

Short answer: An indemnity forces the vendor to spend money defending the customer on a mere allegation, with very few defenses, while a breach of contract claim puts the cost and the burden of proof on the customer. That is why customer paper is full of indemnities.

When negotiating a saas terms of service (representing the vendor of course), I am often trying to explain to my client the difference between an indemnity and a breach of contract claim. I have been noodling on this for years, trying to figure out a simple way of explaining probably the most complex contractual legal concept that exists.

So here goes (shortcut: it is all about the $). Here is the comparison chart I use with clients:

Which one would you want if you were the customer? Right. That is why customer paper is full of indemnities. (And by the way, insurance is just a form of indemnity, so you already know the shape of the deal: somebody else pays to defend you.)

Why the “duty to defend” is the expensive part.

Most vendors fixate on the dollar cap and skip past the two words that actually drain the bank account: defend and indemnify. The duty to defend is triggered by an allegation, not a finding. The moment a third party sues your customer and the claim arguably falls inside your indemnity, you are paying defense counsel, sometimes for years, before anyone decides whether you did anything wrong. Indemnification shifts that cost to you by contract. That is the whole point of it, and it is why an uncapped or carved-out indemnity is the single line item I push hardest on for vendor clients.

The SaaS indemnity you will actually negotiate: IP infringement.

For software and SaaS vendors, the indemnity that shows up in almost every deal is the IP-infringement indemnity. You promise that your service does not infringe someone else’s patent, copyright, or trademark, and if a customer gets sued because it used your product, you step in. As a software and SaaS attorney, I represent lots, literally 100s and 100s, of SaaS companies, and this is the indemnity I spend the most time scoping. Keep it tight:

• Scope it to your product, not to the customer’s data, the customer’s modifications, or third-party tools the customer bolts on.
• Build in the standard remedies: the right to procure a license, modify the service to be non-infringing, or refund and terminate. Without these, your only exit is to litigate.
• Carve out customer-caused infringement: combinations you didn’t authorize, use outside the documentation, continued use after you tell them to stop.

How indemnity interacts with your liability cap.

Here is the trap. You negotiate a tidy 12-months-of-fees liability cap, feel good about it, and then the customer’s form quietly carves the indemnity out of that cap. Now your “capped” deal has an uncapped obligation sitting inside it. For a vendor, indemnity and the limitation of liability are one negotiation, not two. If the indemnity is carved out of the cap, the cap is mostly decoration. Decide deliberately what sits inside the cap, what (if anything) sits in a separate higher “super cap,” and what is truly uncapped. For the vendor-side mechanics of the cap itself, see the liability-model post in the related reads below.

So here’s the practical move.

When a customer hands you paper with a broad indemnity, do not argue about whether you should indemnify at all. You usually will. Argue about scope, control, and cap: what exactly you stand behind, who controls the defense, and whether the dollar exposure is bounded. That is where the real money is, and it is a far more winnable conversation than “please delete your indemnity.” Trust me on this one. I hope this helps.

Indemnity vs. Breach of Contract: Common Questions.

What is the difference between an indemnity and a breach of contract claim? An indemnity makes the vendor pay to defend the customer as soon as a third party makes an allegation, with few defenses. A breach of contract claim makes the customer prove the vendor did something wrong and bear the cost of suing. One shifts cost to the vendor up front; the other keeps it with the customer.

Why is customer paper full of indemnities? Because an indemnity is the better deal for the customer. It forces the vendor to spend money on defense before fault is ever decided, so the customer offloads both the cost and the risk.

Should a SaaS vendor ever agree to an indemnity? Usually yes, but tightly scoped. Limit it to your own product, build in the right to fix or replace the service, carve out customer-caused issues, and keep it inside your liability cap.

For the vendor-side mechanics in detail, a few related reads. SaaS Indemnity: What Types of Insurance Should a SaaS Company Purchase? covers the insurance coverages SaaS vendors need beyond standard E&O. Why You Need a Disclaimer In Your SaaS Agreement shows how a tight disclaimer changed a real case outcome. What Does Your SaaS Agreement Liability Model Look Like? walks through three liability-cap models. Indemnities: 4 Things You Should Know breaks down the four practical indemnity issues. SaaS Contract Negotiations Are Not All About the Software covers the emotional dimension of customer deals. SaaS Agreements Are NOT Good Communication Vehicles argues for using FAQs and policies alongside the contract. SaaS Agreement vs. Software EULA: Which Template Do I Need? is the foundational EULA-vs-SaaS decision tree. Contract or Policy? explains when each is the right tool. And for the clause-by-clause structure of the document itself, see SaaS Agreement Template: Key Clauses Checklist.

Resources:

What Does Your SaaS Agreement Liability Model Look Like?

Indemnities: 4 Things You Should Know

SaaS Agreement Template: Key Clauses Checklist

Disclaimer:

This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.