What is the primary function of an indemnity clause?

An indemnity clause serves to require compensation for losses or damages incurred, making it a critical component in many contracts. This clause is designed to protect one party from the financial repercussions that may arise from certain events, such as wrongful acts, lawsuits, or claims made by third parties. When a contract contains an indemnity clause, it creates an obligation for one party (the indemnitor) to compensate the other (the indemnitee) for specific losses that they might suffer. This function promotes financial security and risk allocation between the parties involved, allowing them to anticipate and manage potential liabilities related to their contractual relationship.

The other options address different aspects of contracts but do not capture the primary role of an indemnity clause. Outlining obligations in the event of a lawsuit relates more to the terms and responsibilities defined within the contract rather than the compensation aspect. Limiting liability for non-performance pertains to limitations on damages but does not involve indemnification for incurred losses. Ensuring equal treatment of parties is a broader principle tied to fairness in contractual agreements rather than the specific financial protections offered by an indemnity clause.