Definition of Indemnity in Business Insurance

Commercial insurance terms and definitions. Learn more about business insurance terminology and get the right coverage for your business.

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Indemnity has two meanings. The first means compensation by an insurer for losses or damages. The second is a liability exemption for damages. Either way, an indemnity is a contractual agreement. Usually, insured individuals know this as an indemnity clause.

Through this agreement, one party, normally an insurance company, pays for the damage or loss that’s caused by another. Thus, when an individual signs up with an insurer, they are guaranteed compensation to a certain extent. This can be related to a medical condition, damage to a home, or items covered by a business.

Yet, this isn’t always the case. For instance, should the policyholder attempt to defraud the insurer, the indemnity clause would be voided. As a result, the insured would need to return the money they received from the insurer or face criminal charges.

How Does Indemnity Work?

The indemnity is based within a clause of a typical insurance agreement. What’s covered depends on what the insured selects. For example, the indemnity clause of an auto insurance policy might contain coverage for injury but not to vehicle repairs. A home insurance policy might have indemnities for theft and fires but not for floods.

These indemnities are given a specific amount of time on the policy. During this period payments must be received by the insured to maintain the coverage. This is a stipulation both parties agree on before the activation of coverage.

Indemnity goes beyond insurance. It also applies to contracts between other parties. For instance, a business agrees to an indemnity clause when they decide to operate within the area of a local or state government. It also applies to financial agreements between the governments of two countries.

How Indemnity Is Delivered

When it comes to insurance, indemnity is delivered through a cash payment or a service. When it comes to a vehicle policy, the indemnity clause states delivery is either in the form of a cash payment or a vehicle’s repair. However, this only takes place if the insured follows through on their side of the agreement. In other words, maintaining monthly premium payments.

Insurance Against Indemnity

There are situations when an organization can purchase insurance against the payment due to damages or losses. When they sign on with an indemnity insurance plan, they are protected from paying out the maximum amount related to the issues.

As an example, take a roofing company with indemnity insurance. Should the replacement roof or a repair go bad for a homeowner, the company would be protected from paying out the full amount for the damage.

Another example is a car manufacturer. They might purchase indemnity insurance in case a fault in one of their vehicles causes serious injury or death. Though they might still have to pay out a settlement, it wouldn’t be as much without the plan in place. However, it doesn’t mean car owners couldn’t sue the company for damages in a court of law.

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