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Consider this scenario: you have purchased a cake for your upcoming wedding from a baker down the street. Your wedding planner has promised to cover all organisational aspects, such as catering, with an agreement between a baker who has agreed to prepare your cake and deliver it to the wedding on the morning of the ceremony. Thus the wedding planner has indemnified you from losses caused by a third party, in this case the baker. If, say, the baker does not deliver the cake, the planner themself is responsible for the financial loss/reparation to you. This may sound very similar to insurance, which is a very common type of indemnification.
Types of Indemnity Clauses
We can now see that indemnity is an agreement between two parties in which one party agrees to compensate the other party for damage caused by a third party. There are three types of indemnity clauses:
The damages from certain, clearly stated circumstances, are the ONLY events need to be compensated to the indemnified party.
The indemnified party, e.g. a goods supplier, is only indemnified for its own acts and omissions during the contract period.
The indemnified party is responsible for insuring the other party for third-party loss or damage e.g. in respect to the supplier’s goods provided.
What constitutes damage or loss
Compensation areas include:
- Injury and death of any individual/party in the contract
- Damage of the property in question
- Intellectual rights
- Legal costs and disbursements
The question to “hold harmless” or “make good”
Understanding the basics of indemnity, one question that often arises is whether the insurer is obliged to simply hold the recipient without harm or to rectify the situation in an attempt to make things “good”.
The insurer is in breach of contract as soon as the indemnified party suffers any loss or damage (i.e., harm has been done). This means that a limitation period (the period where legal action can be taken in response to an event) will start running from the date of the loss. When drafting contracts, this is in the interests of the indemnified party.
The indemnified party is given the right to claim indemnity when they suffer loss or damage, meaning the insurer is only compelled to do anything until called upon to make good the situation. Therefore, a breach of contract can only exist when a claim is made against the insurer and refused, from which the limitation period begins. This is in the interests of the insurer.
How indemnity is paid
Payment for indemnity can come in multiple forms aside from the obvious, money. Depending on the terms of the agreement, other forms of payment can include, but are not limited to, cash, or repairs and replacement of goods and services. For example, a home insurance company that must indemnify their client whose house has been destroyed in a storm will strive to restore the property to its original state. This may involve repairs done by contractors or reimbursement to homeowners for fees incurred due to such repairs.
Period of indemnity
Certain insurance policies have a set period of time in which the provider is indemnified to the customer (e.g. 24 months). Extended period of coverage covers the loss beyond the restoration of a business or property etc. and thus allows covering up of shortfalls.