Indemnity

An overview of the different ways hedge funds invest money.

What is Indemnity?

Indemnity is a contractual obligation made between parties in which one party agrees to pay for possible losses or damages caused by the other party. It is common understanding that a party who suffered injuries has a right to claim reimbursement or compensation against the person who caused the injuries. A typical example is an insurance company wherein the insurer or indemnitor agrees to compensate the insured or indemnitee for any damages or losses he/she may incur during a period of time. Premium payments made by the insured are required to bind the agreement, so the insurer can return or compensate the damages or losses obtained.

Indemnity may be compensated in the form of cash, by way of repairs or replacement, or by other means by which the parties have agreed upon.

For Example:

The owner of a commercial property has been paying an insurance premium to an insurance company so that she can recover the costs for any loss or damage if a future bad event were to happen to the establishment. If the building sustains significant constructional damages from fire, the insurance company will indemnify for the costs to repair by way of reimbursing the owner or by reconstructing the damaged areas by its authorized contractors.

What are the Types of Indemnity?

• Express indemnity – a written agreement to indemnify, where the terms and conditions by which concerned parties must abide are usually indicated.  These include, insurance indemnity contracts, construction contracts, agency contracts, etc.

• Implied indemnity – obligation to indemnify that arises, not from a written agreement, but more from circumstances or the conduct of parties involved.  One practical example is an agent-principal business relationship – when the principal refuses to accept the goods that the agent supplies him, the agent can sell them to others; however, if the agent sustains a loss while selling, the principal is obligated to pay for it.

What is the Importance of Indemnity in Business?

Indemnity is prevalent in most agreements that involve an individual and a business; however, it also applies to businesses and governments or between governments of different countries. This provides financial protection to cover costs in the event of negligence, mistakes, accidents, or some unavoidable circumstances that could highly impact the flow of the business.

Indemnity insurance is one way to be protected against indemnity claims. It protects the holder from paying the full amount of indemnity, even if it is his fault. Many businesses require indemnity, because lawsuits are common. It covers court costs, lawyer’s fees, and settlements. Typical examples of indemnity insurance are malpractice insurance and errors and omissions insurance.