Indemnity Agreement and Insurance Explained

When someone is indemnified, they are protected from the costs of possible damage, injury, or loss in the future. For instance, when you buy fire insurance, your insurance company indemnifies you. So, if a fire damages your property, the insurance company promises to bear the cost of repairing or replacing it (as specified in your policy).

An insurance company will detail your coverage amounts as well as indemnity limitations in your policy terms. The amount of coverage you buy should match the value of your property and your financial circumstances. 

The term “indemnify” also refers to the act of compensating someone “or their loss". When you pay your neighbour for the window your kids broke playing street hockey, you indemnify your neighbour.

Requires the indemnitor to pay damages even when the indemnitee is partially responsible for the loss. But if the indemnitee is solely responsible, the indemnitor is off the hook for damages.

For example, a steering wheel supplier promises intermediate indemnity to a carmaker if they incur losses because a late delivery of steering wheels that causes a delay getting cars to market. If the steering wheels are a day late and the manufacturer leaves them sitting on the receiving dock for an extra day, making them two days late shipping the cars to market, the steering wheel maker would still pay the carmaker for the loss.

But suppose the supplier delivers the steering wheels on time, and there’s a delay getting cars to market. In that case, the steering wheel manufacturer isn’t liable for any losses because they were not in any way responsible for the delay.

Means each party pays for losses they create, but not for each other’s negligence. Consider the carmaker scenario above. If the steering wheels are one day late, and the carmaker leaves them sitting on the dock for an extra day, making the cars ship out two days late, the steering wheel delay would be 50% at fault.

So, the steering wheel supplier would pay 50% of the carmaker’s losses. The carmaker would be responsible for the other 50% since they caused the second day of delay. 

Direct indemnity protects the indemnitee from losses arising out of their own acts. For example, if you hit a tree with your car, your auto insurance will pay the costs of vehicle repairs (minus deductible) even though your bad driving caused the damage. Such agreements may also provide you with a means to recover attorney’s fees and other costs associated with your claim.

This type of indemnification also protects the indemnitee from third-party claims. Using the example above, what if the property owner wants compensation for your car’s damage to the tree? Direct indemnification means your auto insurance company would take on that obligation too.

An indemnity agreement can be written in the form of a hold-harmless agreement too. In this type of indemnity agreement, one party agrees to protect the other party from liability.

For example, if your curling club wants to use your neighbour’s frozen pond as a practice rink, your neighbour may ask for indemnification (protection) against any harm that comes from using the pond. Such an agreement would prevent anyone from suing your neighbour should one of your team members slip on the ice and injure themselves.

Indemnity agreements are an essential part of risk management for individuals, businesses, organizations, and insurers.

Lightning strikes Jennifer’s house during a storm. It causes her chimney to crack and starts a small fire that damages her roof. The total cost to repair the damage to her home is $23,000.

Jennifer makes a claim with her home insurance company for her $23,000 loss. Once her insurance company determines that her policy will cover the incident, they let her know they’ll pay for repairs.

Once repaired, Jennifer’s house is back to the condition it was in before the lightning strike.

Tim owns a coffee shop on the coast. One night, just after everyone had gone home, a tsunami strikes. The powerful wave sweeps Tim’s coffee shop right off its foundation and out into the sea. His coffee shop is gone.

Fortunately, Tim has guaranteed replacement building and content insurance. He called his insurance company and filed a claim. The adjuster assesses the situation and determines that the coffee shop and its contents have washed into the ocean.

To indemnify Tim, the insurance company pays to have a new coffee shop built on the same spot and replace all the furniture, fixtures, equipment, and inventory. Tim gets back to the business of selling coffee to his customers.

Claude just bought a new electric car. He’s excited about his new eco-friendly transportation. Just after he drives off the lot, Claude swerves to avoid hitting a moose and crashes into a ravine.

Claude isn’t seriously hurt because of the advanced safety features on his new car, but the crash destroyed his vehicle. He files a claim with his insurance company. The insurer determines the vehicle is “irreparable.” It’s a total write-off.

The insurance adjuster calculates the car’s actual cash value (ACV) based on year, make, model, odometer reading, options, condition before crash, etc.  They then compare the prices of cars just like Claudes for sale in Claude’s area.

Since Claude’s car was in brand new condition with only nine kilometres on the odometer, the adjuster quickly determines that indemnifying Claude requires giving him enough cash to buy another new car.

Regardless of which method of indemnification the insurance company uses, the insured is restored to the same financial state as before the covered incident occurred. 

• Malpractice insurance
• Errors and Omissions (E&O) insurance
• Directors or Officers (D&O) insurance