What is Indemnity?

Definition: Indemnity is compensation given to a third party for damages or losses suffered. It is a payment that reimburses for monetary or physical losses experienced.

What Does Indemnity Mean?

The term indemnity is most commonly used in insurance environments. It refers to the fulfillment of the obligation taken by the insurance company to pay for damages experienced by a policyholder, within the terms and conditions of the insurance agreement. Indemnities are granted depending on the nature of the event and the pre-established indemnity clauses, drafted in the insurance agreement. These clauses are established to protect insurance companies against fraud and abuses.

Insurance policies normally state what the indemnity’s limit is, meaning the highest payment that can be issued to the policyholder under an circumstances and there are several elements that are taken into account before an indemnity is granted. The term is also employed in legal sentences, where an indemnity is set to be paid to one of the affected parties involved in the legal procedure, to compensate for the damages or losses caused by the legal procedure itself or as the result of the acceptance of the claim being presented.

Example

Mr. Gordon owns a house located in the city of Atkins, Iowa. He purchased the property two years ago and as soon as he bought it he insured it with a full-coverage insurance policy from Premium Home Insurance Company LLC. This policy covers many damaging events like natural disasters, robberies and fire and water damages, among other catastrophic situations. Yesterday, Mr. Gordon was notified that his home apparently flooded.

It appears that a water pipe exploded in the top floor and filled the whole house. His insurance policy covers for such events and the insurance company, according to the indemnity clauses contained in the agreement, should assess the damages first to calculate the amount granted to the owner. After firefighters issued their report, the insurance company analyzed the damages and granted Mr. Gordon an indemnity of $16,500 to repair all damages caused by the water flood.