General Definition
Indemnity is the protection of security against financial loss if and when it may occur. This is the principle upon which insurance contracts are based. The already agreed-upon compensation in these insurance cases is indemnity.
For instance, it is the compensation in the car insurance that makes sure that the vehicle is restored to the prior condition —no better, no worse. In practice, this is limited by the value of coverage and the terms specified in the insurance policy.
Forms of Indemnity
These can be paid in various forms if that is previously agreed upon. They include
- Cash payments
- Repairing costs
- Replacement
- Reinstatement
Carrying on with the car insurance example, cash payments may be given out as compensation keeping the loss and the probable repairing cost in mind but often providing necessary repairing services or a good replacement for the damaged car itself work as this particular financial compensation.
Definition in Banking and Finance
An indemnity is a form of contract when a person (who thereby becomes primarily liable), undertakes to compensate another for the loss he may suffer as a result of a transaction with a third party.
Use of the Term in Sentences
- The car company paid the indemnity upon the horrid accident but the lives lost could not be compensated.
- The life insurance company set the indemnity at a whopping ten million euros.