Houston partner Seth Freedman authored an article, "Indemnification Both a Complex and Necessary Process," which was published in the January 15, 2010 edition of the Houston Business Journal.
According to Freedman, "Indemnification is a key component for both sides of an acquisition transaction. In simple terms, it is a contractual allocation of risk, an agreement that someone is responsible to somebody for something. The details where the devil lurks are spelling out who is responsible, to whom, for what, how long and for how much. Indemnification is usually a major part of any negotiation and worth the effort because it is a good practice to have rules that protect the parties' expectations."
Freedman's article notes that "once 'for what' is decided, 'who' and 'to whom' should follow," with regard to the allocation of risk and that "transactions allocate many risks, so 'for what' must be answered many times." However, the "for what" can be complicated, according to Freedman. "A buyer may want protection against certain types of claims, but the seller may only be willing to indemnify against claims rising from known events. Thus, the seller will represent that all known events are disclosed and limit indemnification to what is disclosed. If an undisclosed event causes a loss then to establish a right to indemnification, the buyer must show the seller knew of—but failed to disclose—the event. This is a complicated 'for what.'"
The article goes on to discuss the "how long" and "how much" questions to be addressed, after the "for what" has been decided, noting that "except for situations where the seller keeps the entire risk, the maximum indemnification obligation is frequently limited to a portion of the total price or at most the full price. If the cap is reached, then the risk shifts to the buyer."