An indemnity clause is a contractual provision where one party (the indemnitor) agrees to cover the losses or damages suffered by another party (the indemnitee) under specific circumstances. In AI red teaming, this clause is a critical tool for allocating the financial risk associated with the engagement, shifting responsibility for potential harm from the client to your firm.
Anatomy of an Indemnity Clause
While often dense with legal language, indemnity clauses typically follow a predictable structure. Understanding these components is essential for both drafting and reviewing your engagement contracts. A failure to scrutinize this section can expose your red team to catastrophic liability.
The Parties and Scope
The clause must clearly define who is giving the indemnity (the indemnitor, typically the red team) and who is receiving it (the indemnitee, the client). The scope often extends beyond the client company itself to include its directors, officers, employees, and affiliates. The core of the clause defines the “triggering events”—the specific actions or situations that activate the indemnification obligation.
Common triggers in a red teaming context include:
- Breach of Contract: Failure to adhere to the terms of the engagement, such as confidentiality or data handling protocols.
- Negligence or Willful Misconduct: Actions that fall below the professional standard of care or are intentionally harmful, resulting in damage.
- Intellectual Property Infringement: Use of tools, data, or techniques that violate a third party’s patents, copyrights, or trade secrets.
- Violation of Law: Breaching applicable laws or regulations (e.g., data privacy laws like GDPR or CCPA) during the assessment.
Covered Losses and Exclusions
The clause specifies what financial consequences are covered. This almost always includes legal defense costs, court judgments, fines, and settlement amounts. The counterpoint to this is the list of exclusions, which are just as important for the red team. You must negotiate clear carve-outs to avoid assuming unbounded risk.
Key exclusions to pursue include:
- Damages resulting from the client’s own pre-existing vulnerabilities or negligence.
- Losses arising from actions the client specifically authorized in writing, even if they led to negative outcomes.
- Indirect or consequential damages, such as lost profits or business interruption, which can be difficult to quantify and insure against.
- Harm caused by the client’s failure to implement recommended remediations.
Unique Challenges in AI Red Teaming
Standard indemnity clauses from traditional cybersecurity testing are often inadequate for the novel risks presented by AI systems. The inherent unpredictability and complexity of models require more nuanced language.
Unforeseen System Behavior and Emergent Properties
An LLM might generate harmful, defamatory, or illegal content in response to a carefully crafted prompt. A reinforcement learning agent might take an unexpected, destructive action in a simulated environment. Your indemnity clause must address who bears the risk for these “black swan” events. A well-drafted clause will tie your liability to the authorized testing procedures outlined in the Statement of Work (SOW), not to the unpredictable output of the model itself.
Data Contamination and Model Integrity
Red teaming activities could, in theory, subtly poison a model’s training data or alter its weights, causing long-term, hard-to-detect degradation in performance. The clause should clarify liability for such events. Ideally, you want to limit your responsibility to damages caused by deviating from the agreed-upon testing plan, especially when working on production or near-production systems.
Third-Party API and Data Risks
If the AI system under test relies on third-party APIs (e.g., a commercial LLM API, a data source), your testing could violate that third party’s terms of service. The indemnity clause should specify whether you or the client are responsible for ensuring compliance and who is liable for any resulting claims from that third party.
Negotiating the Clause: A Two-Sided View
The final indemnity clause is a product of negotiation. Both sides have legitimate interests to protect. Understanding the opposing viewpoint helps you find a reasonable middle ground.
| Contract Provision | Red Team’s Favorable Position (Indemnitor) | Client’s Favorable Position (Indemnitee) |
|---|---|---|
| Triggering Event | Limited to red team’s gross negligence or willful misconduct. | Any claim “arising out of or relating to” the red team’s services. |
| Scope of Loss | Covers only direct damages and excludes consequential or indirect losses (e.g., lost profits). | Covers all losses, damages, liabilities, costs, and expenses, including consequential damages. |
| Liability Cap | Indemnity obligation is capped at the total fees paid under the contract or the limit of insurance coverage. | No cap on liability, or a very high “super cap” for specific risks like data breaches. |
| Control of Defense | Red team has the right to control the defense and settlement of any third-party claim. | Client has the right to control the defense, with counsel of their choosing, at the red team’s expense. |
| Client’s Contribution | Indemnity obligation is reduced proportionally based on the client’s own contributory negligence. | No reduction for client’s contribution; the red team is fully liable if they are even partially at fault. |
Example Clause Analysis
Let’s dissect a simplified indemnity clause to see these concepts in action. This is for educational purposes only and is not legal advice.
-- The Indemnitor and scope of action --
Consultant (the "Indemnitor") shall indemnify, defend, and hold harmless
-- The Indemnitee and its related parties --
Client, its affiliates, and their respective officers, directors, and employees (collectively, the "Indemnitees")
-- The covered losses --
from and against any and all third-party claims, liabilities, damages, and expenses, including reasonable attorneys' fees,
-- The triggering event, narrowly defined --
arising directly from the gross negligence or willful misconduct of the Consultant in its performance of the Services under this Agreement;
-- An important exclusion --
provided, however, that Consultant shall have no obligation to indemnify Indemnitees for any claims to the extent they arise from (i) Indemnitees' own negligence, (ii) Client's pre-existing systems or data, or (iii) actions taken by Consultant in accordance with Client's explicit written instructions.In this example, which is relatively favorable to the red team (“Consultant”):
- The trigger is high: “gross negligence or willful misconduct,” not simple negligence or any error.
- It covers only “third-party claims,” meaning if the client damages itself, this clause doesn’t apply.
- It includes clear carve-outs for the client’s own fault, pre-existing conditions, and actions the client specifically approved. This prevents you from being held liable for following a risky instruction from the client.
Ultimately, your indemnity clause must be reviewed by legal counsel and aligned with your professional liability insurance policy. It is one of the most significant financial provisions in your contract, and getting it right is fundamental to managing the risk of your AI red teaming practice.