Indemnity
What Is Indemnity?
Indemnity means making someone whole again after a loss by covering the cost of the damage. It’s just a fancy way of saying “making things right so you’re back where you started” — no better, no worse.
What Does Indemnity Mean in Insurance?
In insurance, indemnity is the promise to restore you financially to where you were before something went wrong. That means you didn’t profit, but you didn’t lose anything, either.
Think of indemnity like a coat check. If you hand over your jacket and it gets lost, the venue will pay for a similar replacement coat. They won’t buy you a luxury upgrade, but they’ll make sure you’re not left out in the cold. That’s indemnity.
A few important things about what indemnity means in insurance:
- Policy limits and terms matter. Your insurance only pays up to the coverage amount you bought (minus deductibles and sublimits).
- Claims are often valued in one of two ways. In our coat check example:
- Replacement Cost (RCV) pays for a new coat of the same brand and style.
- Actual Cash Value (ACV) pays the value of your coat in used condition, since that’s what you had.
- Contracts use it, too. Indemnity clauses in contracts often mean one party agrees to protect and reimburse another if their actions cause a loss.
How Does Indemnity Work?
Here’s the basic process for how business insurance makes things right after an accident:
- Report it. Tell your insurer quickly if an accident happens and you think it’s covered.
- Document it. Gather photos, invoices, and police reports. Your insurer will help you.
- File a claim. Send in the claim forms and any proofs of loss.
- Adjuster review. A claim adjuster checks what happened and confirms your coverage.
- Valuation. They calculate payment using RCV or ACV.
- Policy math. The insurer applies your deductibles and limits to the payment.
- Exclusions and conditions check. Now that they have the whole picture, the insurer double-checks that all the aspects of the loss are covered.
- Settlement. The insurer pays for covered repairs, replacements, or reimbursement.
- Subrogation (sometimes): If someone else caused the damage, your insurer may pursue them to get reimbursed.
The result: Whoever experienced the loss is back in their original financial position. Not ahead or behind, just whole again.
What Are Some Examples of Indemnity in Insurance?
I. The Caterer’s Fire
- Scenario: A caterer’s chafing fuel ignites a small fire, scorching a hotel wall.
- Contract promise: The venue contract says the caterer will indemnify the venue if their catering causes damage
- Insurance response: The caterer’s general liability pays for wall repairs (minus deductible)
- Result: The caterer keeps their contract promise without footing the whole bill.
II. The Cleaner’s Mistake
- Scenario: A cleaner accidentally etches a client’s marble countertop.
- Contract promise: The service agreement says the cleaner will indemnify the client if they cause property damage.
- Insurance response: The cleaner’s general liability covers repair or replacement costs up to their limits.
- Result: The client is made whole, and the cleaner doesn’t take a major financial hit.
III. The Faulty Phone Charger
- Scenario: An Amazon seller’s imported phone charger overheats and damages a customer’s desk.
- Contract promise: The seller’s purchase agreement requires the manufacturer to indemnify them for losses due to defects.
- Insurance response: The seller’s product liability policy pays the claim, then seeks reimbursement from the manufacturer.
- Result: The customer is compensated quickly, and the seller doesn’t pay out of pocket.
Who Needs Indemnity in a Contract?
In many industries, it’s common for partners to ask for indemnity clauses in contracts. These shift the responsibility for accidents or damage onto you (or, ideally, your insurance). Don’t panic — it’s a normal business practice.
Here are some common examples:
| Requestor | Examples | Why they ask for indemnity |
|---|---|---|
|
Venues, event hosts |
Hotels, event halls, festivals |
Injury or property damage from your setup, staff, or guests |
|
Clients, property owners |
Homeowners, retailers, offices
|
Damage to their space or claims tied to your work |
|
Landlords, property managers |
Commercial leases, shared workspaces |
Risk from tenant operations in a leased space |
|
General/prime contractors |
Construction, cleaning, landscaping subs |
Jobsite injuries or damage caused by subcontractors |
|
Commercial kitchens, commissaries |
Shared kitchens, co-packers |
Contamination, equipment damage, or slip-and-fall risks |
|
Manufacturers, distributors, importers |
Private-label, supply chain partners |
Product defects, fines, or recalls |
|
Marketplaces, platforms |
Farmer’s markets, craft fairs, gig apps |
Liability for sales or services on their platform |
|
Municipalities, schools, HOAs |
Permits, parks, community events |
Public injuries or damage during your event |
|
Studios, rental houses |
Photo or film locations, gear rentals |
Harm to rented spaces or gear |
|
Franchisors, brand licensors |
Franchise agreements, brand partnerships |
Brand/IP protection and operations risks |
Aspect: Cause
Lapse: Automatic end due to a missed payment or renewal
Cancellation: Actively ended by you or the insurer
Aspect: Timing
Lapse: Typically happens after a grace period
Cancellation: Can happen anytime during an active policy
Aspect: Coverage status
Lapse: Paused until reinstated
Cancellation: Ends immediately
Aspect: Reinstatement
Lapse: Often possible within a short window
Cancellation: Usually requires a new application
Aspect: Responsibility
Lapse: Typically on the policyholder
Cancellation: Could be either party
Aspect: Financial impact
Lapse: May increase future premiums; breaks your continuous coverage
Cancellation: May trigger fees or loss of unused premium refund
Aspect: Prevention tip
Lapse: Set up auto-pay or EZ Renew
Cancellation: Communicate early if you need to change or end coverage
Did you know? Indemnity clauses often appear alongside requests for Additional Insured status, Primary & Noncontributory endorsements, and Waivers of Subrogation. Not sure what those mean? Don’t worry — Insurance Canopy can help you get the right coverage to meet contract requirements.
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