In law, to indemnify means to protect a party from suffering any losses. Indemnity is a form of compensation for losses or damages, often in relation to a legal contract. The term refers to both the pre-loss guarantee of compensation and the compensation itself.
The most common type of indemnity is insurance. An insurer indemnifies a policy holder by guaranteeing that the insurer will cover any losses related to certain events. If the policy holder suffers this type of loss, the insurer repays the policy holder the costs associated with the loss.
For instance, a homeowner may have an insurance policy that insures against losses by fire, theft, or flood. In the event of a house fire, the insurer will then pay the homeowner for any losses in the fire. In this way, insurance companies indemnify policy holders.
Indemnity may also refer to a contractual agreement to cover losses suffered by another party. For instance, a company who hires freelance workers to cover projects for a client may agree to indemnify the client if a freelance worker causes a loss to the client. In this case, the company who hired the freelancers will pay for those losses.
The agreement to indemnify another party is always contractual. This means that both parties have agreed to the indemnity. In this way, indemnification differs from damages ordered by a court, in which the payer has no choice.
In most types of insurance contracts, the insurer agrees to indemnify a policy holder by agreeing only to cover actual losses. For example, in the case of a house fire, the homeowner must prove the amount lost. The insurance company will then repay this money.
A different type of indemnification occurs with life insurance. In this instance, the insurance company is obligated to pay out the full amount of the policy, regardless of any tangible losses incurred as a result of the insured's death. In some cases, an insurance policy may contain a double indemnity clause, in which the insurer agrees to pay double the amount of the policy if the insured's death is accidental.
Another type of indemnity insurance is prize indemnity insurance. An insurer agrees to indemnify a party who may be required to give away a large prize, such as a great sum of money or a car, though the odds that this will occur are unlikely. In exchange for the indemnity, the insured pays the insurer a fee.