DEFINITION: The term “indemnity” refers to an extensive type of insurance coverage designed to protect against certain types of damages. In a business context, “indemnity” is primarily associated with financial losses, while in a legal context, it mainly pertains to liability.

Indemnity is a contract (called a “policy”) involving two parties, where one party (the “insurer”) commits to cover potential damages incurred by the other party (“the policyholder” or “the insured”). In return, the policyholder commits to pay premiums to the insurer according to a fixed schedule.

In an indemnity arrangement, the insurer essentially guarantees to fully compensate the policyholder—ensuring that the individual or business is made whole—in case the latter incurs damages covered by the policy.

ETYMOLOGY: The term “indemnity” is attested from the fifteenth century.

The English noun “Indemnity,” and the related verb “indemnify,” are constructed from the Latin adjective indemnis, meaning “undamaged,” “unhurt,” or “uninjured.” Indemnis is composed of the preposition in-, here a privative prefix, and the noun damnum, meaning “loss,” “damage,” “injury, or “harm.”

USAGE: Most insurance policies include an indemnity clause, but the type and amount of coverage it provides may, depending upon the type of policy and its terms.

In any indemnity agreement, there is a defined period of indemnity during which the payment is effective. Likewise, numerous policies incorporate a letter of indemnity, ensuring compliance with the contract terms by both parties, failing which an indemnity obligation goes into effect.

Indemnity clauses are found especially in policies involving both individuals and businesses, such as contracts for obtaining car insurance. However, such policies may also be extended to other circumstances, encompassing, for example, relationships between businesses and governments, or even among the governments of several countries.

Occasionally, local governments, businesses, or entire industries find themselves shouldering a portion of the financial burden of significant public concerns, such as natural disasters or disease outbreaks. In such cases, the federal government may provide “indemnity” (or “indemnification”) to such financially stressed entities, not on the strength of a legal contract, but under the moral pressure of public opinion.

For example, during the devastating bird flu epidemic that ravaged the US poultry industry in 2014 and 2015, the Department of Agriculture paid out $200 million to indemnify farmers who had to cull their flocks to halt the virus’s transmission.