Indemnification Clauses: What You Are Actually Promising the GP

Indemnification is the section where a lawsuit's economics are decided in advance. The party with the better-drafted indemnification controls who pays for litigation, who pays for losses, and whether the partnership funds either side's defense. In real estate syndications, indemnification flows in both directions, and most LPs only read one half of it.

The Two-Way Nature

Every well-drafted LPA contains two indemnification provisions. The GP indemnification protects the GP and its affiliates from claims arising out of partnership operations. The LP indemnification protects the GP from claims arising out of LP misrepresentations. Most LPs read the first one carefully and miss the second one entirely.

The directional symmetry matters because the two indemnifications operate in different contexts. The GP indemnification kicks in when a third party sues the partnership or its principals. The LP indemnification kicks in when something an LP said or did causes the GP a loss. The first protects the sponsor's downside on operations. The second protects the sponsor's downside on the LP's representations.

Both indemnifications are enforceable. Both are routinely invoked. A complete review of indemnification requires reading both, in both the LPA and the subscription agreement.

The Standard GP-from-LP Indemnification

The standard structure provides that the partnership (and therefore the LPs collectively, through their capital) indemnifies the GP and its affiliates against losses arising from partnership operations, except for losses caused by the GP's gross negligence, willful misconduct, or fraud.

This is the version every LP wants to see. Note three features. First, the carve-out includes material breach of the Agreement, not just gross negligence and willful misconduct. Second, the standard is "finally determined by a court," meaning the GP is indemnified during the litigation and only forfeits the indemnification after a final judgment. Third, the indemnified persons are defined broadly enough to capture affiliates and employees.

The GP-favorable version drops "material breach of this Agreement" from the carve-out, narrows the indemnified persons, or removes the "finally determined by a court" language entirely. The LP-favorable version adds "knowing violation of law," "receipt of improper personal benefit," and "breach of fiduciary duty" to the carve-outs.

Carve-Outs That Matter

The carve-outs determine when indemnification stops protecting the GP. The standard four:

• Gross negligence. Conduct that demonstrates a substantial lack of concern for whether an injury results. Higher standard than ordinary negligence.
• Willful misconduct. Intentional wrongdoing or reckless disregard.
• Fraud. Intentional misrepresentation or concealment of material fact.
• Material breach of the LPA. Self-explanatory. This is the carve-out most often missing.

The carve-outs you should fight to add:

• Knowing violation of law. The GP cannot claim indemnification for knowingly breaking the law on the partnership's behalf.
• Receipt of improper personal benefit. Self-dealing, undisclosed compensation, or related-party transactions outside the LPA.
• Breach of fiduciary duty. Critical, but only enforceable in jurisdictions that recognize fiduciary duties as non-waivable for managers.

Pay attention to the standard for finding the carve-out. "Finally determined by a court of competent jurisdiction" is the LP-favorable wording. "Determined by the General Partner in good faith" is the GP-favorable wording, and it lets the GP self-determine whether it has indemnification.

The "Subject to Applicable Law" Trap

Most indemnification clauses are prefaced with "to the fullest extent permitted by law" or "subject to applicable law." That phrase is doing significant work.

Many states have public policy limits on indemnification that override contract language. Delaware (where most LPAs are governed) is generally permissive but has limits. Other states are stricter. Securities law also imposes limits. The SEC has long taken the position that indemnification of officers and directors against securities-law violations is against public policy.

The practical effect is that the indemnification language reads as though the GP is fully protected, but the actual scope of protection depends on the jurisdiction's public policy. A Delaware LPA indemnifying the GP for fraud claims is unenforceable to that extent. Federal securities claims are largely outside the scope of contractual indemnification.

This is mostly an LP-favorable feature. The GP cannot use indemnification to escape securities-law liability or fraud liability. But the language obscures that fact, and an LP reading only the document might think the GP is bulletproof.

Cross-LP Indemnification

Here is the indemnification most LPs miss. The subscription agreement typically contains language requiring each LP to indemnify the GP for losses arising from that LP's representations. Some LPAs go further and require LPs to indemnify each other through a contribution mechanism.

Read that carefully. If LP A misrepresents accredited status and the SEC penalizes the partnership for the failed Reg D exemption, LP B is required to fund a pro-rata share of the penalty. LP B did nothing wrong. LP B's only connection is having committed capital to the same partnership.

The fix is to limit contribution obligations to circumstances where the LP itself was at fault, or to cap the contribution at a percentage of the LP's own commitment. Sponsors will resist this because they want a single coherent indemnification pool, but the LP-favorable position is that one investor should not pay for another investor's misrepresentations.

Sub Agreement Indemnification vs LPA Indemnification

The sub agreement and the LPA contain separate indemnification provisions with separate scopes. The sub agreement indemnification covers the LP's representations and warranties about its accredited status, investment intent, and offering process. The LPA indemnification covers everything else.

The two often overlap but are not identical. A breach of the LPA itself is governed by the LPA indemnification. A breach of the sub agreement reps is governed by the sub indemnification. A breach of side letter terms is governed by the side letter, which usually defaults to the LPA standards.

When negotiating, treat them as separate documents. The sub agreement indemnification is harder to narrow because securities counsel insists on it for offering-exemption reasons. The LPA indemnification has more give. Push for caps and carve-outs in both, but expect more concessions in the LPA.

The Insurance Backstop

Indemnification is only as good as the partnership's ability to fund it. If the indemnification claim arrives in bankruptcy, the indemnification is worthless. Insurance fills the gap.

The relevant policies in real estate syndications:

• Directors and Officers (D&O). Covers GP individuals and entities for management decisions. Standard coverage is $5M to $25M depending on portfolio size.
• Errors and Omissions (E&O). Covers professional services claims. Less common but increasingly standard for sponsors that provide asset management services.
• Fiduciary Liability. Covers ERISA-related claims for funds with plan-asset exposure. Mandatory if any LP is an ERISA plan.
• General Liability and Property. Covers operational risks at the property level. Limited relevance to LPA indemnification claims.

The LPA should require the GP to maintain D&O coverage at a defined minimum and should require notice to LPs if coverage lapses or is reduced. Verify the coverage is in place. Ask for the certificate of insurance during diligence.

What insurance does not cover: fraud, intentional acts, criminal conduct, and (in most policies) regulatory fines. The carve-outs in the indemnification track the carve-outs in the insurance policy, which is intentional. The sponsor cannot insure against intentional misconduct, so the indemnification cannot cover it either.

What Strong LP-Favorable Language Looks Like

Here is the version to ask for:

What Weak Language Looks Like

The pattern to push back on:

Three problems. First, the carve-out is limited to "intentional fraud," excluding gross negligence and willful misconduct. Second, the determination is made by the GP itself, not a court. Third, there is no LP cap on the partnership's indemnification obligation. This language should be a deal-breaker.