Lia Kopin-Green
December 27, 2022

What is Indemnity?

The term “indemnity” refers to security or protection against a financial liability. Indemnity is the obligation of one party, known as the indemnitor, to compensate another party, the indemnitee, for any losses or damages caused by the indemnitee. In United States business law, indemnity clauses may be implemented in contracts as a way to allocate risk and liability between the contracting parties. Indemnity clauses are often used as a tool to make sure individuals or businesses are not held liable for certain losses or damages that are beyond their control. 

A common example of indemnity is an insurance contract, in which the insurer, or indemnitor, agrees to compensate the insured (the indemnitee) for damages in return for premium payments. 

Key Takeaways

  • Indemnity refers to a legal concept that involves one party agreeing to compensate another party for any losses or damages that they may incur.
  • In general, indemnity is used to balance risk and liability between contracting parties. 
  • Indemnity is a common component in most insurance policies.

Types of Indemnity

Indemnity can be divided into two main categories: expressed indemnity and implied indemnity. In the following discussion, we will explore the differences between these two concepts in more detail.

An expressed indemnity, also known as a written indemnity, occurs when the terms and conditions of the indemnification clause appear in written form in the relevant contract. In these cases, the liabilities and obligations of all relevant parties should be stipulated in the contract. Properly expressed indemnity is legally binding and subject to legal consequences. In order to ensure that the indemnity clause is properly interpreted and enforceable by law, it is recommended to have it drafted by a skilled attorney. 

Implied indemnity, on the other hand, refers to agreements that impose obligations on the relevant parties. However, in these particular cases, the terms and conditions of the indemnity clause are not explicitly included in the contract. Instead, relevant circumstances simply imply indemnity. Since these situations are quite complex, you may want to consult with an attorney if you have any questions about implied indemnity.

Indemnity for Directors of Corporations

Indemnification agreements are frequent in corporate law and are often used to attract professionals to serve as directors for certain corporations. According to these agreements, potential directors are protected against liability, losses and lawsuits that may occur throughout their work at the company. Therefore, directors who sign indemnification agreements will not be held responsible if the business is sued or someone seeks damages from the business.

Bottom Line

To summarize, indemnity is a key concept that can be found in many different types of contracts. Indemnity is especially important in insurance law and corporate law.

By seeking the support of an experienced attorney, businesses can ensure that their indemnification agreements are properly drafted and legally binding. This is sure to provide a much-needed layer of protection against a number of claims.

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