Indemnity In M&A Template and How to Draft One (2026)

What is an indemnity in M&A? In a merger or acquisition, an indemnity is a promise by the seller to reimburse the buyer, on a pound-for-pound or rupee-for-rupee basis, for loss arising from a specified risk. Indemnities sit alongside warranties in the share purchase agreement (SPA). A warranty is a statement of fact that, if untrue, gives a damages claim the buyer must prove and quantify. An indemnity is a direct promise to cover a known or specific risk, usually with fewer hurdles, which is why buyers press for indemnities on anything found in due diligence, such as a tax exposure, a live dispute, or an environmental issue. The commercial fight in M&A is rarely about whether there is an indemnity. It is about the limits: how small a claim can be (de minimis), how much total loss must build up before the seller pays anything (the basket or threshold), the overall ceiling on the seller's liability (the cap), how long claims can be brought (time limits), and how payment is secured (escrow or warranty and indemnity insurance). This article is general guidance, not legal advice. M&A terms vary by jurisdiction and deal, so have qualified advisers structure any indemnity before you rely on it. ## Sample indemnity and limitation clause Copy the block below and fill the bracketed fields. Figures are illustrative. ```

INDEMNIFICATION AND LIMITATIONS 1. SPECIFIC INDEMNITIES The Seller will indemnify the Buyer against all Losses arising from: (a) [identified tax matter]; (b) [identified litigation / claim]; (c) [identified compliance or environmental matter]; on a rupee-for-rupee (or dollar-for-dollar) basis, without the Buyer needing to prove a breach of warranty. 2. GENERAL WARRANTY CLAIMS The Seller will also be liable for breach of the warranties in [Schedule], subject to the limits below. 3. DE MINIMIS No individual claim may be brought unless it exceeds [AMOUNT or % of price]. Claims below this are ignored. 4. BASKET / THRESHOLD The Seller is liable only once qualifying claims together exceed [AMOUNT or % of price]. Once exceeded, the Seller pays [the excess only (deductible) / the whole amount from the first rupee (tipping)]. 5. CAP The Seller's total liability is capped at [AMOUNT or % of price]. [A lower cap applies to general warranties; a higher cap, up to the purchase price, applies to fundamental warranties (title, capacity) and tax.] 6. TIME LIMITS Claims must be notified within [N] months of completion for general warranties, and within [N] years for tax and fundamental warranties. 7. SECURITY [Option A: Escrow] [AMOUNT or %] of the price is held in escrow for [N] months to meet claims. [Option B: W&I insurance] The Buyer holds a warranty and indemnity policy; the Seller's liability for insured warranties is limited to [a nominal amount / the policy retention]. 8. CONDUCT OF CLAIMS The [Buyer / Seller] controls the defence of third-party claims, keeps the other informed, and will not settle without consent not to be unreasonably withheld. 9. MITIGATION AND DOUBLE RECOVERY Losses are reduced by recoveries from insurance or third parties, and the Buyer may not recover the same loss twice.

- **De minimis (clause 3).** Filters out trivial claims. Market figures cluster around a small fraction of deal value, often in the range of about 0.01% to 0.1% of the price, but this varies by jurisdiction and deal size.
- **Basket or threshold (clause 4).** Decide between a "deductible", where the seller pays only the excess above the threshold, and a "tipping" basket, where crossing the threshold makes the seller pay from the first rupee. Buyers prefer tipping, sellers prefer a deductible. US surveys suggest most baskets act as a true deductible.
- **Cap (clause 5).** Expect a lower cap for general warranties and a higher cap, often up to the full purchase price, for fundamental warranties (title and capacity) and tax.
- **Time limits (clause 6).** General warranties are usually short, often 12 to 24 months, while tax and fundamental warranties run longer to match statutory limitation and tax audit periods.
- **Security (clause 7).** Traditionally a slice of the price, often in the region of 10% to 15%, sits in escrow. Where warranty and indemnity insurance is used, escrow often shrinks or disappears, and the seller's residual liability is limited to a nominal amount or the policy retention. ## How warranty and indemnity insurance changes the deal Warranty and indemnity (W&I) insurance lets a buyer claim against an insurer, rather than the seller, for breach of insured warranties. It is common where the seller wants a clean exit, such as a private equity fund returning capital. When W&I is in place, the policy is designed to match the SPA's warranties, de minimis, basket, and cap, so there are no gaps. The policy retention (the uninsured first slice) often sits around 0.5% to 1% of enterprise value, though this is falling on larger deals. Because the insurer stands behind most warranty claims, escrow often becomes unnecessary and sellers accept low de minimis and basket figures. Note that W&I policies exclude what the buyer's team actually knew, matters fairly disclosed, purchase price adjustments, and forward-looking statements, so those risks still need specific indemnities or separate cover. These are market observations, not fixed terms, and figures vary by jurisdiction. Last verified October 2026. ## Common mistakes to avoid - Letting a known, diligenced risk fall under the general cap and basket instead of a standalone rupee-for-rupee indemnity.
- Leaving "deductible versus tipping" ambiguous in the basket clause.
- A single cap for everything, with no higher cap for title, capacity, and tax.
- Time limits shorter than the relevant tax audit or statutory limitation period.
- Assuming W&I insurance covers everything, when it excludes known and disclosed matters.
- No conduct-of-claims clause, so the parties fight over who controls a third-party dispute. ## A note on jurisdiction Indemnity practice varies by jurisdiction. Market figures for de minimis, basket, cap, and escrow differ between the UK, US, India, and elsewhere, and so does the tax treatment of an indemnity payment, which can affect whether a gross-up is needed. Limitation periods for tax and fundamental warranties track local law. Enforcement of foreign-law indemnities and the choice of governing law and forum also matter. Treat any market percentage as a starting point to test against your own deal and local advice, not a rule. ## Where a contract workspace helps A template gets you a workable indemnity package. The ongoing work on a live deal is keeping the SPA, the disclosure letter, the W&I policy and the diligence findings consistent so the limits actually line up, checking each draft for a cap or basket that quietly shifts risk, and tracking notification deadlines long after completion. Drafting the indemnity, reviewing where a de minimis, basket or cap no longer matches the insurance, tracking the claim-notification dates, and governing the deal through rounds of mark-ups can all live in one AI workspace tuned to how your company handles M&A. A workspace such as [Adira](https://adiralaw.com) is built to keep the whole deal in one place.