Indemnity

What is 'Indemnity'

Indemnity is compensation for damages or loss, and in the legal sense, it 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 or the indemnitor) agrees to compensate the other (the insured or the indemnitee) for any damages or losses, in return for premiums paid by the insured to the insurer.

BREAKING DOWN 'Indemnity'

An indemnity clause is standard in most insurance agreements. Exactly what is covered, and to what extent, depends on the specific agreement. Any given indemnity agreement has what is called a period of indemnity, or a specific length of time for which the indemnity is valid. Similarly, many contracts include a letter of indemnity, which guarantees that the contract stipulations will be met by both parties or else an indemnity must be paid.

Indemnity is common in agreements between an individual and a business (for example, an agreement to obtain car insurance), but it also applies, on a larger scale, to relationships between businesses and government or between governments of two or more countries. Sometimes, government, a business or an entire industry must take on the costs of larger issues on behalf of the public, such as outbreaks of disease. For example, the U.S. government made $200 million in indemnity payments in the wake of a bird flu epidemic that nearly wiped out the domestic poultry industry in 2014 and 2015.

Indemnity Insurance

Indemnity insurance is a way for a company (or individual) to protect itself against indemnity claims. This insurance protects the holder from having to pay the full sum of an indemnity, even if the holder is at fault for the cause of the indemnity in the first place. Many companies make indemnity insurance a requirement, as lawsuits are common. Everyday examples include malpractice insurance, which is common in medical fields, and errors and omissions insurance (E&O), which protects companies and their employees against claims made by clients and applies to any given industry. Some companies also invest in deferred compensation indemnity insurance, which protects money they expect to receive in the future.

Like any other form of insurance, indemnity insurance covers the costs of an indemnity claim, including but not limited to court costs, fees and settlements. The amount covered by insurance depends on the specific agreement, and the cost of the insurance depends on many factors, including past history of indemnity claims.

Property leases also include indemnity clauses. In the case of a rental property, for example, a tenant is typically responsible for damages due to negligence, fines, lawyer fees and more, depending on the agreement. 

Acts of Indemnity

An act of indemnity protects those who have acted illegally from being subject to penalties. This exemption typically applies to public officers, such as police officers or government officials, who are compelled to break the law in order to carry out the responsibilities of their jobs. Often, such protection is granted to a group of people, who committed an illegal act for the common good, such as the assassination of a known dictator or terrorist leader.

History of Indemnity

Although indemnity agreements haven't always had a name, they are not a new concept, as they are a necessary part of ensuring cooperation between individuals, businesses and governments. In 1825, Haiti was forced to pay France what was then called an "independence debt." The payments were intended to cover the losses that French plantation owners suffered in land and slaves. While the indemnity described in this article is now known to have been unjust, it is just one of many historical cases that show the ways indemnity has been used worldwide.

Another common form of indemnity is the reparations a winning country seeks from a losing country after the conclusion of a war. Depending on the amount and extent of the indemnity due, it can take years and even decades to pay off. One of the most well-known examples is the indemnity Germany paid after its role in World War I. Those reparations were finally paid off in 2010, almost a century after they were put in place.

The word "indemnity" stems from the Latin root indemnis, meaning "unhurt, undamaged" or "without loss."

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 be obligated to bring it back to its original state, either by means of repairs by authorized contractors or by reimbursing the homeowner for expenditures incurred for such repairs.