An indemnity is a comprehensive form of insurance compensation for damages or loss. When the term indemnity is used in a legal sense, it may also refer to an exemption from liability for damages.
This is a contractual agreement between two parties. In this arrangement, one party agrees to pay for potential losses or damages caused by another party. A typical example is an insurance contract, in which the insurer or Indemnitor agrees to compensate the other (the insured or the indemnitee) for any damages or losses in return for premiums paid by Insured to the insurer. With indemnity, the insurer indemnifies the policyholder that is, promises to insure the individual or business for any covered loss.
WHAT IS AN INDEMNITY AGREEMENT
An indemnity agreement is a contract that ‘holds a business or company harmless’ for any burden, loss, or damage. An indemnity agreement also ensures proper compensation is available for such loss or damage.
PARTIES TO AN INDEMNITY AGREEMENT
- The Indemnitee: Also referred to as the Insured. Is the one who is protected from any liability.
- The Indemnifier (Indemnitor): Also known as the Insurer. Is the one who promises to reimburse the Indemnitee for any claims.
OTHER NAMES FOR INDEMNITY AGREEMENT
Other names for indemnity agreements include:
- Hold Harmless Agreement
- No Fault Agreement
- Waiver of Liability
- Release of Liability
READ ALSO: DEED OF ASSIGNMENT: EVERYTHING YOU NEED TO KNOW.
WHAT DOES AN INDEMNITY AGREEMENT LOOKS LIKE.
Example of wording
“[Company/Business/Individual Name] shall fully indemnify, hold harmless and defend _______ and its directors, officers, employees, agents, stockholders and Affiliates from and against all claims, demands, actions, suits, damages, liabilities, losses, settlements, judgments, costs and expenses (including but not limited to reasonable attorney’s fees and costs), whether or not involving a third party claim, which arise out of or relate to any act or omission of [Company/Business/Individual Name].”
WHAT BUSINESSES USE INDEMNITY AGREEMENT?
- Construction Businesses: Before hiring a contractor, a construction business might make contractors sign an indemnity agreement to protect against lawsuit if a contractor is injured due to negligence.
- Rental Car Companies: Rental car companies often have drivers sign an indemnity agreement before driving the car off the lot. This is to protect against lawsuits should the driver get in an accident in the rental car.
- Rental Properties: Before moving into a rental property, a landlord might require the tenant to sign an indemnity clause in the tenancy agreement. This would protect the landlord from any loss or damages that the tenant might cause to the property.
An indemnity agreement can be useful for many reasons, but if not understood properly, it can have serious consequences for the person who signed. Be sure to understand your indemnity agreement before you sign.
PRINCIPLES OF INDEMNITY: A defining characteristics of insurance, providing that a loss payment will replace what is lost, putting the insured back to where it was financially prior to the loss without rewarding or penalizing the insured for loss. The four exceptions to the principle of indemnity includes Life Insurance, Personal Accident Insurance, Replacement Cost Coverage and Valued Policies.
- Life insurance: Life insurance is not contracts of indemnities simply because life cannot be valued in terms of money. Legally, therefore, it has been kept outside the scope of the principle of indemnity.
- Personal accident insurance: Personal accident insurance is not contracts of indemnities because body parts or limbs cannot be valued in terms of money. Legally, therefore, it has been kept outside the scope of the principle of indemnity.
- Replacement cost coverage: It is also outside the scope of the principle of indemnity.
- Valued policies and First Loss Insurance: Valued policies are those policies where the value of the property is agreed beforehand and which is made the sum insured under the policy. The condition of such a policy is that if there is a total loss than the full sum insured is to be paid even though the actual value is less than the sum insured. Here, the insured makes a gain. If the actual value is more than the sum insured then the insured sustain losses.
Therefore, the principle of indemnity is not followed strictly as the usual appreciation and depreciation is not taken into account. But if there is a partial loss under a valued policy, it is settled on indemnity basis as is usually done under a normal policy on the ordinary market value basis. The value agreed upon previously may however play an important role in matters of determining liability easily and quickly. It is quite often argued, therefore, that valued policies are departures from the principle of indemnity.
The following points should be noted in this regard:
- Only in case of a total loss there is the possibility of making either over-payment or under-payment. From experience it can be said that the possibility of total loss is very rare as mostly we experience partial losses.
- In case of partial loss, which is more common, the loss is treated under normal indemnity basis.
- Undervalued policies, the value that is agreed upon at inception is not just an arbitrary value but a value having a very realistic bearing on the actual market value.
- Valued policies are not usually given to those parsons whose bona-fides are not in the knowledge of insurers. In other words, issuance of valued policies very restricted.
- Valued policies are usually issued on articles of fairly stable value.
- It may be said that under valued policy the measure of indemnity is decided at the inception as opposed to ordinary policies where the measure of indemnity is decided at the time of claim.
Valued policies actually considered as contracts of indemnity in law and considering the above points it can very well be said that valued policies are in fact modifications of the principle of indemnity and certainly not departures from the principle of indemnity.
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