Indemnity or indemnification is a common term that is included in many contracts. In its simplest form, indemnity means that one party in the contract is responsible for compensating another for loss, damages, and/or injury incurred as a result of that party’s actions. In other words, indemnity provides a form of protection against a financial liability.
What is an Example of Indemnity?
Paying for insurance is a simple example of indemnification. The extent of what is covered in an insurance policy will differ depending on the specific agreement, but for the purpose of explaining indemnity, consider the following example:
Let’s say you pay an insurance company for accident insurance on your car. The usual agreement is that the insurance company pays for any repairs or even a replacement of your car (or the other person’s car) should you get into an accident. In this case, the agreement is that your insurance company will pay for any financial hardship you experience as a result of a car accident, in exchange for a bi-weekly or monthly premium you pay to them.
What is an Example of Indemnity in Business?
Indemnity is often used in business to help the business owner avoid being held liable for injuries or accidents that are not the fault of the business.
As an example, let’s say Susan owns a dog boarding business. Wilson, a dog owner, decides to drop off his dog at Susan’s kennel while he goes on vacation. During the stay, Wilson’s dog gets upset and bites another client of Susan’s. If Susan included an indemnity clause in her pet boarding contract that she gets clients like Wilson to sign, then Wilson may be responsible for paying veterinary costs incurred as a result of the bite.
What Can You Use an Indemnity Agreement For?
An Indemnity Agreement or clause can generally be used for the following purposes:
- Compensation due to loss, damage, and/or injury
- Legal costs associated with dealing with loss, damage, or injury
- Loss of expected profit, such as a contractor not finishing work on schedule so your retail store couldn’t open on time
- Breach of contract
- Protection against certain liability in negligence
Indemnification in a Contract
An indemnification clause is generally included in most contracts to provide financial compensation for one party as a result of the potential act or omission of another party in the contract. Indemnity works to provide individuals with financial peace of mind in a variety of situations.