Why would a seller ever agree to an indemnity cap that's less than the full purchase price?

Because an indemnity exposure tied to the full purchase price, or worse, left uncapped, would leave a seller financially at risk indefinitely for problems that might surface well after they have handed over control of the business and moved on. A seller who agrees to a lower cap is essentially buying certainty: a known, defined ceiling on how much they could ever have to pay back after closing, rather than an open-ended exposure that could theoretically consume the entire proceeds of the sale, or more.

This is a completely rational negotiating position, particularly for an individual seller who plans to use the sale proceeds to retire or fund another venture and cannot realistically keep the full purchase price in reserve indefinitely against a hypothetical future claim. Sellers who successfully negotiate a lower cap often give something else in exchange, such as a larger holdback for a defined period, a somewhat longer survival period, or a lower basket threshold, so the buyer still has meaningful protection even though the ultimate ceiling on recovery is lower than the full price paid.