Published February 28, 2023 • 4 minute read
While both transfer loss responsibility from one party to another, it’s important to understand their key differences.
Whereas an insurance policy is a contract that assigns an insurer the responsibility to cover the cost of a claim, an indemnity is the clause itself that transfers loss responsibility to a certain party. That said, indemnities can exist without insurance policies, but policies require indemnities to assign loss responsibility.
In this explainer, we’ll break down these differences in more detail, highlight additional terms to know, and discuss why indemnification is important.
What Is Indemnity?
An indemnity refers to a contractual obligation for one party to provide compensation in the event of losses on the part of another.
These clauses are written into contracts to delineate a party would incur the costs of any damages or losses in the event of an accident.
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 loss responsibility 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, or policy, mandating financial coverage from an insurer in the event of damages or losses.
Think of it this way: While an insurance policy contains an indemnity to transfer loss responsibility, indemnities are those clauses, themselves—existing with or without the policy.
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.)
There’s still more to know with indemnity-related insurance. Here are several more terms likely to crop up within such a clause:
An indemnitee is the party in a contract free from liability for compensation related to losses. (This is the status most of us would strive for in a negotiation.)
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 indemnity relates to compensation for losses, it is technically possible to be held harmless for liability while still being responsible for costs, and vice versa.
Why Indemnification Is Important for Risk Management
Regardless of which exact term is used to describe the indemnity/indemnification process, the key is that this clause lays out specific financial responsibilities in the event of unexpected occurrences.
If you are the indemnitor, it is vital to ensure these terms are not overly broad, to limit your risk exposure.
Conversely, if you are the indemnitee, it is a good idea to ensure the indemnification clause covers every possible eventuality, to guarantee the indemnified party is responsible for everything they should be.
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.
However, modernized insurance tracking solutions are often a welcome alternative to this—accounting for the indemnity status of all parties, their documentation, and any associated risks in order to streamline processes as much as possible.
How BCS Helps
Especially when partnering with several third parties, it can be tricky to keep track of the myriad indemnities and insurance paperwork essential for any business partnership.
To streamline these processes, automated insurance tracking solutions take the human error, guesswork, and hassle out of the equation—seamlessly storing all documents in a secure server where you can easily manage them and chat with vendors.
Rather than poring over paperwork to determine indemnity status and other specifications, AI-powered capabilities automatically highlight contract fields for you—saving time so you can track, access, and correct them with a few clicks.
At the end of the day, although vendor management processes are an important piece of any project, they don’t have to be stressful—and with advancements like these, optimizing yours just got way easier.
BCS is a leading vendor management solution providing full- and self-service tracking for your insurance policies and other contracts. To optimize your processes today, contact us or schedule a demo.