In general terms indemnity is compensation paid by one party to another party in respect of a particular loss sustained by the receiving party. The indemnitor (the party who pays the compensation) does not have to be responsible for the loss of the other party though they may be. There are many different forms that indemnity can take including repairs of damage, replacement of items, and reinstatement of service and cash payments.
In legal terms indemnity has a broad meaning which is that an indemnity is intended to make an individual party to a contract “whole” again if a specific contractual event should take place. Though the event is clearly explained in the contract the actions taken to make the contract “whole” are usually factually understood and unknown to the different parties of the contract until that event takes place – and maximum liability for indemnity is usually specified under the contract. An indemnity is not considered to be the same as a guarantee under law even though it may appear to be similar.
In insurance terms indemnity is where the insurer undertakes the responsibility through an insurance contract to make the insured party “whole” again.
What does indemnity mean in terms of Auto Insurance?
In the case of a vehicle insurance policy, the insurer may carry an obligation of indemnification. In this instance where a policy holder is involved in an accident and that accident is clearly their fault the insurance carrier is obliged to indemnify their driver for very specific circumstances to ensure that they are “whole” again.
In these circumstances the insurer may be required to pay compensation to the driver (for example they may need to compensate for the loss of wages while the driver undergoes medical treatment). The may need to pay damages for legal and medical bills or for pain and suffering caused by the accident. And of course there may be payments for towing the vehicle to a recovery station, the repair of vehicles involved in the accident to restore the condition to pre-accident levels and even for rental vehicles for the parties while they await the repair of their original vehicles.
Thus in auto insurance the insured party receives a general promise that in the event of specific instances that the insurer will provide a means of restoring the injured party to make them “whole” again.