What is Indemnity?

Published by Thomas Herold in Economics, Laws & Regulations, Real Estate

'Indemnity' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Indemnity refers to financial compensation for loss or damages incurred by an individual or business. It comes from the original Latin word indemnis which translates to “without loss” and “undamaged” or “unhurt.” The idea behind it springs from the premise of a contract between two groups, businesses, or individuals. One party will invariably promise to cover any possible damages or losses that they other party causes. When used in a legal setting, the word also pertains to the idea of gaining an exemption from being liable for damages. In the nation of Canada, the word means the salary which parliamentarians receive.

Insurance is a classic example of such indemnity. In these financial contracts, the insurer (who is the indemnitor) promises to provide compensation to the insured (who is the indemnitee) against any losses or damages. In exchange for this pledge, the insured will pay pre-arranged and agreed upon premiums to the insurer. Insurance contracts would not exist without such clauses.

These agreements will also feature a period of indemnity. This refers to the set time frame in which the guarantee is binding. There are also such contracts that provide letters of indemnity. These guarantee that the stipulations of the contract will be adhered to by both parties. If they are not, then indemnities have to be paid by the contract breaching party.

Clearly such indemnities are commonplace with contracts struck between businesses and individuals, as with insurance companies and their customers. On far grander scales, they are also prevalent in deals made between governments and companies, as well as in agreements made between governments of multiple nations.

There is also Indemnity Insurance. With such a policy, businesses and individuals are able to obtain protection in the event of any claims. Such a policy safeguards the policy holder from the necessity of having to pay out a large sum in indemnities. It does not matter if the policy holder is ultimately at fault or not. A great number of corporations require such insurance because of all the frivolous lawsuits in the United States.

There are countless examples of everyday insurance needs in this respect. Malpractice insurance and E&O errors and omissions insurance are two of the most common. Malpractice insurance is issued to protect medical providers. E&O insurance protects corporations and employees of the company in case customers make any claims against them. Other companies are so concerned about this problem of being held responsible that they pay for Deferred Compensation Indemnity Insurance. This forward-thinking policy actually safeguards money which the firm anticipates earning at some point and time in the future.

These specific insurance policies provide for the various costs associated with such a claim. This includes such expenses as settlements, fees, and the legal and court costs. The insurance amount may not cover the entire costs though. The particular limitations in dollars and types of fees will be specified by the policy itself and is often based upon past claims.

There are also indemnity clauses where property leases are concerned. Tenants who obtain a rental property will be responsible for any damages which arise from their own negligence, fines they incur, and associated legal fees. Each agreement will specify the particulars.

The concept surrounding indemnities dates back hundreds of years. The New York Times revealed in an 1825 article entitled, “French President Makes Unprecedented State Visit to Haiti” that the country was being required to pay to France a debt to cover French plantation owner losses because of the destruction of their plantation lands and the emancipation of their slaves.

Winning nations also exact war indemnities from losing countries after the end of many conflicts. Some of these war reparations required from years to decades to pay. The best remembered example of such long-lasting indemnities is the one which Germany had to pay for its part in starting and prosecuting the First World War. It took until 2010 for Germany to finally finish paying the war reparation debt, as the New York Times told in its piece from that same year, “Ending the War to End All Wars.” This was almost a century after they began paying it.

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The term 'Indemnity' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.