Indemnity Definition

Indemnity in insurance refers to the principle of compensation for a loss or damage incurred by the insured party. It ensures that the insured is restored to the same financial position they were in before the occurrence of the covered event. In essence, indemnity aims to place the insured in the same economic position after a loss as they were in immediately before the loss, without profiting from the insurance coverage.

For example, if a business suffers property damage covered by its insurance policy, the insurer would indemnify the business by reimbursing the cost of repairing or replacing the damaged property, up to the policy’s limits and after deductibles. Indemnity is a fundamental concept in insurance contracts, ensuring that insurance policies provide financial protection against unforeseen events without creating a financial gain for the insured. It promotes fairness and transparency in insurance transactions by aligning compensation with actual losses incurred.