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What is Indemnity?

Updated on February 2, 2010

Indemnity, in law, is an agreement by which one party (the indemnitor) promises to make good the loss or damage that may be caused to the other party by the occurrence of a specified event. Typical instances are property insurance, providing for reimbursement for loss or damage that the insured owner may sustain from fire or theft, and automobile liability insurance contracts, which provide for reimbursement to the insured of any amounts he may have to pay as damages for injuries caused to other persons by negligent operation of the insured vehicle. In life insurance, the term "double indemnity" refers to a clause whereby the insurance company, in exchange for the payment of an additional premium, agrees that twice the amount of the policy will be paid if the insured's death results from accidental rather than natural causes.

The essential difference between contracts of indemnity and contracts of guaranty or suretyship is that a guarantor or surety becomes legally liable only upon the default of another person. A familiar example of a guaranty arrangement is the completion bond that a building contractor may be required to obtain. This is the promise of a bonding company (the guarantor) to pay for the completion of the building if the contractor fails to finish the job. A typical suretyship arrangement exists when a surety company issues a "fidelity bond" agreeing to make good any losses an employer may sustain through theft of funds by a bonded employee.

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