Indemnity is compensation paid by one party to another to cover damages, injury or losses. Indemnification is the act of being protected from or not being held liable for damages, loss or harm, by shifting the liability to another party (e.g. an insurance company). The two terms are commonly used interchangeably.
Typically, indemnity is a contractual agreement which includes compensation by cash payments, replacement, repairs, or reinstatement.
In a legal sense, indemnity is the same as compensation or reparation.
The owner of this house was indemnified. This means the insurance company covered the repair costs caused by the lightning damage.
According to Oxford University Press, the word indemnity originates from French indemnite, from late Latin indemnitas, and from indemnis, meaning ‘unhurt, free from loss’.
An example of an indemnity would be an insurance contract, where the insurer agrees to compensate for any damages that the entity protected by the insurer experiences.
According to the Cornell University of Law, another example would be “when a subcontractor agrees to indemnify a general contractor for any losses that occur as a result of the subcontractor’s work – whether they be as a result of a suit filed against the general contractor for failure to adhere to contractual terms, or because of personal injury suffered at the job site by a worker or some other individual.”
Home insurance indemnity
When people take out a home insurance policy, they pay premiums to the insurance company. In the arrangement, the homeowner will be indemnified if the house sustains damage, such as fire, earthquake, storm damage, and other hazards listed in the insurance agreement.
The insurer has to pay to bring the property back to its original state if something happens, either by reimbursing the homeowner for expenses incurred or paying contractors directly.
Double indemnity is a provision of insurance in which the insurance company agrees to pay the insured entity double the amount covered if the loss or injury is due to particular circumstances.
In life insurance, double indemnity may include death caused by murder (by someone who is not the beneficiary of the policy) or because of certain accidental circumstances.
Professional indemnity insurance
If you offer advice, your skills or knowledge as part of your profession, you should consider taking out professional indemnity insurance. It covers the cost of compensating clients for damage, loss resulting from negligent services, or advice provided.
In some professions you are not allowed to practice without professional indemnity insurance. These include lawyers, healthcare professionals, accountants, architects, and financial advisers.
The Association of British Insurers says “Compensation claims can be brought against you even if you provided a service or offered advice for free.”
Video – What is Indemnification?