Can insurance proceeds or tax savings reduce what a seller owes under an indemnity?

The rule

No statute governs how an indemnity's Losses definition may offset recovery against insurance or tax benefits; both offsets are creatures of the clause the parties drafted, not of any external law. A common-law duty to mitigate loss does exist independently of any offset language — a party claiming a loss must generally act reasonably to avoid or reduce it — but that duty does not, on its own, require an indemnified party to pursue a separate third party's insurance policy before collecting from its own indemnitor, and it does not require proof of a future, uncertain tax outcome before a present loss is compensated.

So net of insurance, pursued first and net of tax benefit, actually or reasonably expected to be realized language goes further than the general law of damages requires — it is a contractual timing and burden allocation the parties chose, not a background rule that applies without being written down. And the clause's own words decide the timing: an insurance offset applying to amounts actually recovered, after the buyer pursues the claim in good faith, does not suspend the seller's payment obligation until that recovery is exhausted; a tax offset reaching a benefit actually realized or reasonably expected to be realized does not reach a deduction not yet claimed, for a cost not yet fully incurred.

When this changes

Whether the seller pays now and waits for a later insurance recovery to true up, or the buyer has to exhaust insurance first, turns entirely on which of those two structures the offset clause actually uses — and sellers' counsel who want the benefit of an offset have to negotiate the timing mechanics, not just the existence of the offset.

Where this plays out in the Case Files

These questions come up because a specific deal turned on them. Three from this hub:

• • An indemnity that had to wait on an insurance claim and a tax deduction nobody had filed yet — an indemnity that had to wait on an insurance claim and a tax deduction nobody had filed yet — and the clause's own wording deciding which of two structures actually applied.
• • An understated EBITDA line was worth seven times more than it recovered — the companion Losses-definition question — not an offset, but a categorical exclusion on how damages are measured in the first place.

Sources

• • No statute governs how an indemnity's Losses definition may offset recovery against insurance proceeds or tax benefits. The common-law duty to mitigate exists independently of any such clause but does not, on its own, require exhausting a third party's insurance or proving a future tax outcome before collecting from a contractual indemnitor.
• • Treadstone Law's library does not have an article addressing insurance or tax-benefit offset language within an indemnity's Losses definition directly; no link is included for that reason.