What is indemnity insurance?
Key takeaways
- Your home and car insurance policies are contracts of indemnity.
- In an indemnity contract, you pay a premium in exchange for financial compensation for a covered loss.
- Indemnity contracts are designed to restore you, the policyholder, to your pre-loss condition.
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Powered by Coverage.com (NPN: 19966249)
Coverage.com, LLC is a licensed insurance producer (NPN: 19966249). Coverage.com services are only available in states where it is licensed. Coverage.com may not offer insurance coverage in all states or scenarios. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.
What does indemnity mean in insurance?
Indemnity insurance may sound like a complicated insurance product, but the word indemnity simply refers to an insurance policy that provides financial coverage for unexpected damages. With a contract of indemnity, the policyholder pays a premium in exchange for this coverage.
How does indemnity insurance work?
An insurance policy is a contract between you and your insurance company. As the policyholder, you are the “indemnitee,” and your insurance provider is the “indemnitor.” In an indemnity contract, one party (the indemnitor) promises to compensate another (the indemnitee) for covered losses and damages.
The term “indemnification” refers to the act of compensating another party after a loss has occurred. Through indemnification, you are “restored” to pre-loss condition.
It’s a common misconception that when you experience a home or auto insurance loss, your insurance company will replace your property with something nicer than what you had before. It’s true that you can add things like new car replacement to your car insurance policy or insure your personal belongings at their replacement cost value. However, you cannot profit from insurance; instead, it is designed to “make you whole.”
For instance, if your two-bedroom, one-story home burns down, insurance won’t replace it with a five-bedroom, two-story home. Insurance will help replace what you lost with something comparable, not give you something significantly more valuable.
What is an indemnity policy?
Indemnity in auto insurance
An auto insurance contract makes it your insurance company’s responsibility to indemnify you after you are involved in a covered accident. That means when you purchase a car insurance policy, your insurance company agrees to compensate you or another party for losses or damages according to the policy’s terms and limits.
A car insurance company may cover a policyholder in the following ways:
- Legal fees: Liability insurance can help cover legal fees in the event of a lawsuit brought by a harmed party after a covered accident.
- Medical bills: Liability insurance can help cover medical expenses incurred by the other driver and their passengers if you cause an accident, up to your liability limits. If you have medical payments coverage, your insurance company also agrees to help cover the medical bills of you and your passengers.
- Vehicle repairs: If you cause an accident that results in physical damage, your insurance company also helps indemnify the other driver as a part of your liability coverage. If you have collision coverage, you could also receive compensation for repairs to your vehicle.
Indemnity in home insurance
Indemnification works similarly in home insurance. Your home insurance policy may help make you whole after covered damage in the following ways:
- Liability: If someone is injured on your property and sues you, your insurance company can help with costs associated with a lawsuit.
- Guest medical payments: If someone is injured on your property, your insurance company can help with their medical bills.
- Personal property: When your personal property (like furniture and clothing) is damaged or destroyed in a covered claim, your home insurance company helps pay to repair or replace your items.
- Home and other structures: When your home or the detached structures on your property (like a shed or fence) are damaged by a covered peril, you can file a claim for those damages.
Who should have indemnity insurance?
Having car insurance coverage is required in most states. However, outside of state-required levels of liability, carrying higher liability limits and maintaining a full coverage policy can help avoid the financial burden of paying for vehicle damage out of pocket. While home insurance is not required by law, it’s beneficial to carry for the same reason.
Note that if you purchased a car with an auto loan or purchased a home with a mortgage, your lender will likely require you to carry insurance as a condition of the loan.
If you’re unsure whether or not you need indemnity insurance beyond state-mandated auto coverage or lender-mandated home insurance, consult a licensed insurance professional. Insurance is an individualized product, so speaking with an agent about your specific circumstances is the best way to get personalized advice.
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