What's the Difference Between Indemnification & Insurance?

The main difference between indemnification and insurance is that the former represents the process of transferring loss responsibility within a contractual relationship, and can exist independent of a policy, while the latter represents the actual contract backed by an insurance company.

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Published May 19, 2020   •   3 minute read

The world of insurance has lots of terms that can be confusing to those new to the subject. It’s a safe bet that no two in the industry get confused as often as indemnity and insurance—for very good reason. This explainer breaks down the differences between them. 

 

What Is Indemnity?

In an insurance context, an indemnity refers to a contractual obligation for one party to provide compensation in the event of losses on the part of another party. 

 

Is Indemnity the Same As Insurance?

The short answer is no. Despite some similarities, insurance and indemnity are separate entities altogether, with the key differentiator being that you can have indemnity without an insurance policy (for example, many business contracts include indemnity clauses), but not the other way around. 

 

Here’s why: Indemnity is the process by which responsibility for losses is explicitly transferred within a contractual relationship. Without this, there’s no way for an insurance policy to establish that accountability—meaning there would be no way to actually enforce its provided protections.

 

Insurance, on the other hand, is the actual contract, aka policy, mandating financial restitution from an insurance company in the event of losses.    

 

Indemnification vs. Indemnity

These two terms are often used interchangeably. For example, it is common to see both indemnity clause and indemnification clause describing the same provision within a contract defining legal responsibility for losses. 

In some cases, however, indemnification delineates the act of securing freedom against liability for losses or harm. So when a contract stipulates indemnity from losses on the part of another party, you have achieved this. (However, it would be just as correct to state that you have indemnity.)

 

Additional Terms

The confusion with indemnity-related insurance terms doesn’t quite end there. Here are several more likely to crop up within such a clause:

  • Indemnitee

An indemnitee is the party in a contract who is free from liability for compensation related to losses. This is the status most of us would strive for in a negotiation.

  • Indemnitor

The indemnitor is the party liable for losses or damages. They bear the financial and legal responsibility in the event of a setback, accident, or other issue that may lead to losses. In an insurance contract, this is typically the insurer.

  • Hold Harmless

Hold harmless is a provision that typically exists within an indemnity clause—and one sometimes confused for the concept of indemnity. Hold harmless language releases an indemnitee from liability for losses. As we now know, indemnity relates to compensation for losses. Thus, it is technically possible to be held harmless for liability while still being responsible for costs, and vice versa. To learn more, check out our hold harmless explainer.

 

Why Indemnification is Important for Risk Management

Regardless of which exact term is used to describe the indemnity/indemnification process, the key thing to understand from a risk management perspective is that the clause lays out specific financial responsibilities in the event of specific occurrences

As such, in cases where you are the indemnitor, it is vital to ensure the terms of the clause are not overly broad, to limit your risk exposure. 

Conversely, in cases where you are the indemnitee, it is advantageous to ensure the indemnification clause covers every possible eventuality, to guarantee the indemnified party is covering everything they should.

 

Pay Attention to Contractual Language

It is very easy to misinterpret specific terms within a contract—especially compared to how a court of law may interpret them. If you are currently tracking and reviewing contracts and insurance documents in-house, we recommend you work with legal counsel as well as your insurance professionals to ensure both legal and insurance considerations are addressed in the context of the contract.

 

How BCS Helps

BCS provides full-service insurance document review for your insurance policies and other contracts. With the BCS App, you can keep track of an unlimited number of certificates of insurance, or you can opt for a complete audit from our in-house experts, to maximize your risk management efforts. Unlike other insurance tracking companies, not only will BCS collect and track your insurance documents, we also review and correct them.

 

However broad or limited in scope, your relationship with BCS will include a team of highly trained specialists available to you, offering swift and effective support. Ready to get started? Schedule a demo today

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