Indemnity

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DEFINITION of 'Indemnity'

Compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability for damages. The concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party. A typical example is an insurance contract, whereby one party (the insurer) agrees to compensate the other (the insured) for any damages or losses, in return for premiums paid by the insured to the insurer.

INVESTOPEDIA EXPLAINS 'Indemnity'

Indemnity may be paid in the form of cash, or by way of repairs or replacement, depending on exactly what is spelled out in the indemnity agreement.

For example, in the case of home insurance, the homeowner pays insurance premiums to the insurance company in exchange for the peace of mind of knowing that he or she will be indemnified if the house sustains damage from fire, natural disasters or other perils specified in the insurance agreement. In the unfortunate event that the home is damaged significantly, the insurance company will undertake to bring it back to its original state, either by means of repairs undertaken by its authorized contractors, or by reimbursing the homeowner for expenditures incurred in association with such repairs.

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