An IP indemnity carve-out is an exception to the vendor's intellectual-property indemnification obligation. The vendor agrees to defend the customer against claims that the product infringes a third party's IP, but only if the claim does not fall into one of the named exceptions. Carve-outs are how vendors keep their indemnity exposure within the limits of what their insurance and balance sheet can absorb.
Standard carve-outs cover claims arising from: customer modifications to the product, customer combinations of the product with other software not provided by the vendor, customer-supplied data or content, customer use of an older version after the vendor offered an updated one, and use outside the scope contemplated by the contract.
In the AI era, two additional carve-outs have become near-universal. Claims arising from the customer's prompts (because the vendor cannot control what the customer types). And claims arising from the customer's specific use of model outputs (because the customer is the one publishing or relying on the output). These mirror longstanding software carve-outs but at the model-input and model-output layers.
The negotiation is rarely about removing carve-outs entirely; it is about scoping them tightly. "Customer modifications" should not cover ordinary configuration of the product within the documented features. "Customer-supplied data" should not cover data the vendor knows it will be processing. "Use outside scope" should be tied to specific written restrictions, not to a vague good-faith standard. Tight carve-outs preserve real indemnity coverage. Loose carve-outs hollow it out.