Everyone loves surprises. Right? Maybe. But no one enjoys dealing with an unexpected catastrophe.
Disaster is never a good thing, but knowing you’re protected can soften the blow. Having an indemnity agreement can save you from losing everything. It’s essential for protecting your home, family, and other interest.
But what is indemnity, and how do you get it? Here’s what you need to know.
Indemnity is a contractual agreement between two parties that calls for one party (the indemnitor or indemnifier) to secure the other party (the indemnitee) against loss or damage. The agreement may call for the indemnitor to compensate the indemnitee directly for a financial loss. Or it may specify that the indemnitor must pay a third party (like the hospital that treats you for an injury after an accident).
Insurance policies have indemnity clauses that set the terms under which they’ll compensate a policyholder for financial losses. They generally also specify the limits of their obligations and circumstances or actions that can disqualify a damage claim.
An indemnity clause or agreement provides financial protection against potential losses arising from a specific risk or set of circumstances. For instance, health insurance protects the insured from the costs of serious injury or illness.
What Does It Mean to Indemnify Someone?
When someone is indemnified, they are protected from the costs of possible damage, injury, or loss in the future. For instance, when you buy fire insurance, your insurance company indemnifies you. So, if a fire damages your property, the insurance company promises to bear the cost of repairing or replacing it (as specified in your policy).
An insurance company will detail your coverage amounts as well as indemnity limitations in your policy terms. The amount of coverage you buy should match the value of your property and your financial circumstances.
The term “indemnify” also refers to the act of compensating someone “or their loss". When you pay your neighbour for the window your kids broke playing street hockey, you indemnify your neighbour.
Types of Indemnity
There are three basic types of indemnity used in contracts. They are broad, intermediate, and limited indemnification. These terms refer to the scope of protection promised.
Broad Form Indemnity
The indemnitor promises to protect the indemnitee from damages due to negligence by any party, including third parties. It is the broadest protection the indemnitee can get. Broad indemnification agreements often contain phrases like “in whole or in part” when describing fault.
Intermediate Form Indemnity
Requires the indemnitor to pay damages even when the indemnitee is partially responsible for the loss. But if the indemnitee is solely responsible, the indemnitor is off the hook for damages.
For example, a steering wheel supplier promises intermediate indemnity to a carmaker if they incur losses because a late delivery of steering wheels that causes a delay getting cars to market. If the steering wheels are a day late and the manufacturer leaves them sitting on the receiving dock for an extra day, making them two days late shipping the cars to market, the steering wheel maker would still pay the carmaker for the loss.
But suppose the supplier delivers the steering wheels on time, and there’s a delay getting cars to market. In that case, the steering wheel manufacturer isn’t liable for any losses because they were not in any way responsible for the delay.
Means each party pays for losses they create, but not for each other’s negligence. Consider the carmaker scenario above. If the steering wheels are one day late, and the carmaker leaves them sitting on the dock for an extra day, making the cars ship out two days late, the steering wheel delay would be 50% at fault.
So, the steering wheel supplier would pay 50% of the carmaker’s losses. The carmaker would be responsible for the other 50% since they caused the second day of delay.
An indemnity agreement allocates risk between contracting parties. In the case of an insurance policy, the insurer takes on a defined risk in exchange for premium payments. For instance, your car insurance provider assumes the financial obligations for car repairs if your car is damaged. They define the risk based on your driver. Better drivers get lower rates because the risk of a claim is lower.
Direct indemnity protects the indemnitee from losses arising out of their own acts. For example, if you hit a tree with your car, your auto insurance will pay the costs of vehicle repairs (minus deductible) even though your bad driving caused the damage. Such agreements may also provide you with a means to recover attorney’s fees and other costs associated with your claim.
This type of indemnification also protects the indemnitee from third-party claims. Using the example above, what if the property owner wants compensation for your car’s damage to the tree? Direct indemnification means your auto insurance company would take on that obligation too.
An indemnity agreement can be written in the form of a hold-harmless agreement too. In this type of indemnity agreement, one party agrees to protect the other party from liability.
For example, if your curling club wants to use your neighbour’s frozen pond as a practice rink, your neighbour may ask for indemnification (protection) against any harm that comes from using the pond. Such an agreement would prevent anyone from suing your neighbour should one of your team members slip on the ice and injure themselves.
Indemnity agreements are an essential part of risk management for individuals, businesses, organizations, and insurers.
Double indemnity is exactly what it sounds like, a promise by the indemnitor to pay twice the actual amount of damages to the indemnitee. It’s a clause sometimes added to an insurance policy in exchange for a slightly higher premium.
A double indemnity clause stipulates that the insurer will pay twice the value specified on the policy under certain circumstances. Double indemnity in the case of accidental death is regularly included in both life and accident insurance policies.
Individual insurance companies may define “accidental” death differently. They may limit double indemnity to specific types of accidents. Some may include death caused by third-party negligence or intentional acts of violence as well.
The payout for accidental death can be double or triple the policy’s face value. The policy will specify the exact multiple.
Indemnity Cases Examples
Insurance is an indemnity agreement between an insurance company and an individual or organization (the insured). In an insurance agreement, the insured agrees to pay a premium in exchange for the promise of indemnification in the event of a covered incident.
There are three ways the insurance company can indemnify the insured person or organization.
Pay to Repair Damages
Lightning strikes Jennifer’s house during a storm. It causes her chimney to crack and starts a small fire that damages her roof. The total cost to repair the damage to her home is $23,000.
Jennifer makes a claim with her home insurance company for her $23,000 loss. Once her insurance company determines that her policy will cover the incident, they let her know they’ll pay for repairs.
Once repaired, Jennifer’s house is back to the condition it was in before the lightning strike.
Pay to Replace the Damaged Item
Tim owns a coffee shop on the coast. One night, just after everyone had gone home, a tsunami strikes. The powerful wave sweeps Tim’s coffee shop right off its foundation and out into the sea. His coffee shop is gone.
Fortunately, Tim has guaranteed replacement building and content insurance. He called his insurance company and filed a claim. The adjuster assesses the situation and determines that the coffee shop and its contents have washed into the ocean.
To indemnify Tim, the insurance company pays to have a new coffee shop built on the same spot and replace all the furniture, fixtures, equipment, and inventory. Tim gets back to the business of selling coffee to his customers.
Pay Cash to the Insured to Cover Their Losses
Claude just bought a new electric car. He’s excited about his new eco-friendly transportation. Just after he drives off the lot, Claude swerves to avoid hitting a moose and crashes into a ravine.
Claude isn’t seriously hurt because of the advanced safety features on his new car, but the crash destroyed his vehicle. He files a claim with his insurance company. The insurer determines the vehicle is “irreparable.” It’s a total write-off.
The insurance adjuster calculates the car’s actual cash value (ACV) based on year, make, model, odometer reading, options, condition before crash, etc. They then compare the prices of cars just like Claudes for sale in Claude’s area.
Since Claude’s car was in brand new condition with only nine kilometres on the odometer, the adjuster quickly determines that indemnifying Claude requires giving him enough cash to buy another new car.
Regardless of which method of indemnification the insurance company uses, the insured is restored to the same financial state as before the covered incident occurred.
Indemnity insurance refers to insurance that covers the policyholder in the event of unexpected damages or losses up to a specific limit. It’s a supplemental form of liability insurance. Typical examples of indemnity insurance are:
- Malpractice insurance
- Errors and Omissions (E&O) insurance
- Directors or Officers (D&O) insurance
This type of indemnity insurance covers damage awards, settlements, and legal expenses arising from lawsuits against the insured. If someone sues the policyholder, their insurance company pays the damages. That way, the policyholder doesn’t.
Finding the Insurance You Need
Having indemnity means you have security or protection from financial loss.
You buy insurance so that you will be indemnified if you suffer a loss. Whether for your home, property, or health, knowing you’re protected offers peace of mind.
Need help finding the right insurance? Let Insurdinary do the shopping for you. Contact us to learn about your best options.