Definition of indemnity
From Middle French indemnité, from Late Latin indemnitas (“security from damage”), from Latin indemnis (“undamaged”), from in- (“not”) + damnum (“damage”).
indemnity (plural indemnities)
- (law) an obligation or duty upon an individual to incur the losses of another.
- (law) the right of an injured party to shift the loss onto the party responsible for the loss.
- (insurance) a principle of insurance which provides that when a loss occurs, the insured should be restored to the approximate financial condition occupied before the loss occurred, no better, no worse.
An indemnity is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnitor (A) may or may not be responsible for the loss suffered by the indemnitee (B). Forms of indemnity include cash payments, repairs, replacement, and reinstatement.
General & legal meaning
Indemnity is often used as a synonym for compensation or reparation. While it is true, that all three can be construed as obligations to act on an injured party's behalf given the occurrence of a contractually-specified event.
However, indemnity as a legal concept, has a much broader meaning than the other two terms; namely, an indemnity is to make a party to a [[contract] "whole" again should that contractually-specified event occur.
While the event may be specified by the contract, the actions that must be taken to make the injured party "whole" again are largely fact-based and unknown to the parties until the event occurs, while the maximum liability is often expressly limited by the contract.
A car insurance policy is an example of indemnification. If a purchaser of car insurance policy is involved in an accident wherein the liability for the accident is undisputedly of their insured driver, then the insurance carrier has the duty to indemnify their insured driver in very specific ways to make them "whole" again.
The insurance carrier may pay them compensation (recompense for lost wages that would have normally occurred). Pay them for medical/legal/(pain and suffering) damages (i.e., those costs arising specifically as the result of the accident), reparations to tow and repair the vehicles involved in the accident returning them to their original condition, and the payment of rental vehicles while awaiting repairs.
It is in the breadth of the insurance carrier's obligations that we see the application of an indemnity; in other words, an indemnity is a "generalized promise of protection against a specific type of event by way of making the injured party whole again."
An indemnity should also be differentiated from a guarantee. A guarantee is the promise of a third party to honor the obligation of a party to a contract should that party be unable or unwilling to do so (usually a guarantee is limited to an obligation to pay a debt). This distinction between indemnity and guarantee was discussed as early as the eighteenth century in Birkmya v Darnell. In that case, concerned with a guarantee of payment for goods rather than payment of rent, the presiding judge explained that a guarantee effectively says "Let him have the goods; if he does not pay you, I will."
Source: Wiktionary. Published under the Creative Commons Attribution/Share-Alike License.