What Is Indemnification?

In insurance, indemnification is a legal principle that means your insurer agrees to compensate you for covered losses in amounts equal to what was lost. Below, we take a closer look at what indemnity means and how it may affect you as a policyholder.

What is Indemnification?

Indemnity is the act of being compensated by your insurer for a loss that returns you as close to your financial position as possible before the loss. "Indemnification" is a similar term that you can see also has the same general meaning.

Your insurer agrees to bear losses arising from covered accidents or property damage when you are insured. Instead of you paying out of pocket for the liabilities or the recovery of the property, the insurer takes the account to restore your financial condition to a state similar to what it was before the incident. If it is an event involving another party, such as a car accident, your insurer may sue the other party to recover damages.

How does Indemnification work?

Your insurer indemnifies you (compensates you for your loss) after a covered claim. With auto insurance, the insurer transfers financial responsibility from you to itself for costs resulting from an accident or other covered event.

This could mean paying for vehicle repairs, medical treatment, and attorneys' fees or lawsuits in a lawsuit. Without your policy and indemnity clause, you would be responsible for these bills. The process and principles are the same for other types of insurance, such as homeowners and commercial property insurance.

What Is the Role of Depreciation in Indemnification?

Policyholders sometimes face claims problems due to depreciation. Depreciation is the loss of value of an item due to all causes, such as age and condition. It can be cause for concern because if you total an older or high-mileage car, your insurer's payment may not be enough to replace it.

Depreciation plays a minor role in some parts of home insurance because most policies today have replacement cost coverage for structural damage. If you have to completely replace a damaged roof or other structure in your home, paying the full cost for a new roof of the same type is the only practical option for the insurer.

However, it is essential to consult the owner's policy to verify their type of coverage. Older homes may have a modified replacement cost policy so that special features, such as hardwood floors, are replaced with standard building materials. Also, unless you have replacement cost coverage for your belongings, the insurance company can indemnify them only for their actual cash value (ACV or depreciated value), not what it would cost to buy new items.

Indemnification vs. indemnity insurance

Indemnity is not the same as indemnity insurance (also known as professional liability insurance).

As mentioned, indemnification is an agreement entered into by your insurer to return you to equivalent financial status after a covered claim. Indemnity insurance is supplemental liability insurance designed to protect service providers or other professionals who advise, provide expertise, or provide specialized services.

This type of insurance offers coverage that protects professionals from lawsuits brought against them for negligence or failure to perform their duties, and the resulting legal costs or other financial losses.

Typical types of indemnity insurance in the business environment can include negligence, errors and omissions (E&O) and directors and officers (D&O) insurance.

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Source: LawInfo.com

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