What is an "indemnity clause" in contract law?

An indemnity clause is a provision in a contract where one party agrees to compensate another for certain damages or losses that may occur as a result of specified actions or events. This type of clause is commonly included in agreements to allocate risk and protect one party from financial liability, expenses, or damages that arise from the actions of the other party or third parties.

For example, in construction contracts, a general contractor may include an indemnity clause to ensure that subcontractors compensate them for losses arising from the subcontractors' work or negligence. This creates a safety net for the party seeking indemnification, allowing them to recover costs related to claims, legal fees, and other associated expenses.

Understanding the role of an indemnity clause is essential in risk management, as it helps parties outline responsibilities and protections clearly, thus minimizing potential disputes over liability. This is why the answer centered on compensation for damages is correct.