The terms indemnity and insurance are tightly intertwined, and a working knowledge of indemnity can go a long way towards a deeper understanding of the modern insurance industry. Indemnity is a sum paid by party A to party B, by way of compensation for a defined loss suffered by party B. In the case of an insurance contract, the indemnitor – party A, may be responsible to pay for the loss due to the initialisation of the insurance policy. While financial compensation is by far the most common type of indemnity used in the insurance industry, other forms of indemnity include repairs, replacement costs, and reinstatement.

In context of the insurance industry, indemnity is often used in the same way as the terms compensation or reparation. However, it is also a legal term that has a more defined and specific meaning. In terms of the legal system, indemnity means to provide compensation to a third party under a contract in the case that a loss was suffered and defined under the said contract. It is in many ways a form of legal obligation, although it is a form of voluntary obligation set up by a specific contract and not a form of legal liability.

Indemnity insurance compensates policy owners for specific financial losses that occur while a contract is in operation and are defined by that contract. In terms of an insurance contract, proof is generally required in the case of loss before an insurance company is obliged to make a financial payout. While the definition of proof and indemnity may differ with individual types of insurance policies and specific contracts, all insurance contracts are based in one way or another on the process of indemnity.

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