indemnity in insurance

What is the Meaning of Indemnity in Insurance?

April 15, 2024
Mordechai Kamenetsky

Indemnity is the principle where an insured person or company is restored to the same financial position as they were in before some sort of loss occurred.

What Indemnity in insurance?

When it comes to insurance, indemnity is all about making sure a person who is insured gets back to the initial position they were in before a loss. Basically, this means that actual financial loss is compensated rather than becoming profit for any party involved in the insurance process.

How does Indemnity work?

When you buy an insurance policy, what you are actually doing is paying for protection. This protection is against possible future financial losses that occur from unforeseen events, such as theft, natural disasters, and accidents. 

The purpose of indemnity is to make sure you aren’t left in a worse financial situation after an event occurs than you were before it happened.

Indemnity vs. Profit

One of the main reasons indemnity is part of insurance is to prevent the insured from profiting after a loss. Insurance isn’t made to create money for people. It’s a way to cut down on financial risk. 

With that in mind, the compensation you get from an insurance company is usually no more than the actual value of whatever loss you suffered.

Indemnity Limits and Deductibles

Indemnity often has certain deductibles and limits to be aware of. These are important factors that determine the amount of coverage and what the responsibilities are for the person who is insured.

Limits of Indemnity

Insurance policies often have a predetermined amount of indemnity available. That means there is a maximum amount that the insurance provider will pay out if a covered loss occurs. 

The limits are going to vary based on what kind of coverage you have and the specific terms of that policy. To ensure you have enough coverage, you must have an understanding of the limits of indemnity. 

Make certain you have reviewed your policy to be sure that the limits meet your needs and financial situation. 

For some people, this might mean the need to purchase more insurance. Others might wish to adjust their policy limits to better protect their assets.


Another feature of insurance that can impact indemnity is the deductible. Deductibles are a certain amount of money that insured parties pay out of their own pockets before the insurance takes over covering costs.

 In most cases, a higher deductible leads to lower insurance premiums while a lower premium creates higher premiums.

When a loss happens, the person insured is responsible for paying the amount of the deductible. This has to be done before the insurance company jumps in and offers indemnity for any additional damages. 

As such, choosing a deductible that you can easily afford in the event of a loss is extremely important.

The Role of Loss Payees in Indemnity

The next question you may have could be: What is the role of a loss payee when it comes to indemnity? 

Loss payees have an important role in ensuring that indemnity is upheld the way it should be. 

A loss payee is a person or other entity that has a financial interest in some form of insured property. When a person makes them a loss payee on their insurance policy, their financial interests are kept safe even if there is a covered damage or loss on the property in question.

Ensuring Fair Compensation

If someone experiences a loss, the insurance company will provide them with appropriate compensation. This is done to make sure all parties get the financial support they deserve based on their specific financial stakes.

Preventing Double Recovery

Another reason associated with indemnity is preventing a practice called double recovery. 

Basically, this means that the insured person or company cannot get more money than the value of the loss they suffered. Since loss payees are involved in indemnity, it lets insurance companies prevent any possibility of double recovery. This keeps the compensation process fair and honest.

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Mordechai Kamenetsky

Mordechai Kamenetsky, co-founder and lead agent of Kickstand, is recognized as an expert in workers' compensation. He is passionate about helping small businesses manage risks and lower their workers' comp costs. In his articles, he educates readers and clients on the intricacies of workers' comp insurance.

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