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The Difference Between Indemnities and Insurances

The Difference Between Indemnities and Insurances

Indemnities and insurances are a means of managing risk and transferring financial losses. However, they differ in the manner they shift the risk.

8th July 2020
Reading Time: 3 minutes

Indemnities and insurances are a means of managing risk and transferring financial losses. However, they differ in the manner that they shift the risk. For indemnities, the indemnifier voluntary accepts the transfer of risk. In an insurance policy, the insurer receives a premium for the acceptance of risk. In this article, we’ll explain how indemnities and insurances are different.

Indemnity  

An indemnity refers to a clause in a contract where one party (the indemnifier) promises to protect another party (the indemnified) in the case of loss caused by a specific event. Thus, the indemnity clause transfers the risk of loss from one party to another. Indemnity clauses are in many contracts. In construction contracts, for example, an indemnity clause works to protect the owner of the property from claims of injury brought on the construction site. The indemnity clause transfers the risk from the owner to the contractor. 

Types of Indemnities

The phrasing of the indemnity clause determines the amount of risk that an indemnifier accepts. An indemnity clause may be so broad that it covers all liabilities arising out of the contracts, without any qualification. This is known as a bare indemnity clause. It can even apply where the sole cause of the fault is indemnified party. For example, even if the owner of a property is at fault for a third-party claim, under a broadly construed indemnity clause, the owner may be able to recover the losses from the contractor. Often, a party with a greater bargaining power can insist on a bare indemnity. 

The indemnity clause may be less broad and require that the indemnifier must be at some fault before the other party can be indemnified. This is called a limited indemnity clause. It would require, for example, some fault by the contractor for the owner of a property to seek indemnification for the whole loss. An indemnity clause may be more limited by restricting the right to indemnity to the loss solely caused by the indemnifier. In this example, the contractor will not be liable for the loss that was not caused by him. If the claim is for $100,000 and the contractor was 10% responsible for the damage, then the contractor must only indemnify $10,000 to the owner. 

Other types of indemnities include party/party indemnities where both the indemnifier and the indemnified agree to indemnify each other for loss caused by the indemnifiers breach of contract. A third party indemnity is an indemnity that specifically protects the indemnifier in cases of third party claims.

Insurance 

Under an insurance policy, one party (the insurer) promises to accept the loss of another party (the insured). This is in return for a premium. The insurance policy determines the scope of the promise and the amount of the premiums. The policy can protect the insured party from specific events like fire or flooding. Otherwise, the policy can protect a specific asset like a house or a machine. Insurance lawyers can help you guide through the process of claiming on insurance. You can receive a free quote for an insurance lawyer here.

While running a business, a company will need a variety of insurances. Public liability insurance protects the company from loss arising from a third party claim. It generally cover a variety of costs. This includes the legal costs for defending a claim, medical costs of the third party due to the incident, and any damage to business products. A company may also require worker’s compensation policy for its employees. Professional indemnity insurance protects an insured party in case of loss arising from their breach of professional duty.  You can visit our guide ‘What Insurance Policies Should my Company Have in Place?‘ for more information on company insurances.

Conclusion

Insurance and indemnities are a means of transferring risk. A party met with unexpected loss can rely on insurances and indemnities. But, insurance policies require the payment of a premium. An indemnifier accepts the risk voluntarily in a contract.

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Author
Meru Sharma

Meru is a legal tech intern at Lawpath and a Bachelor of Laws student at The University of Technology Sydney. He is interested in how technology can help bring the legal industry into the 21st century.