Finance term
Indemnity
Also known as: indemnification, principle of indemnity
Definition
Indemnity is the legal and insurance principle that a claimant should be restored to the financial position they were in before a loss — no better, no worse. Most property and casualty policies are indemnity contracts; life insurance is not (it pays a fixed benefit regardless of actual economic loss).
Detailed explanation
The principle of indemnity underlies most property and liability insurance. When you suffer a covered loss, the insurer's obligation is to restore you to your prior financial position — not to enrich you. This principle prevents claim inflation and moral hazard (the risk that insurance incentivizes reckless behavior).
In practice, indemnity shapes how claims are valued. Actual Cash Value (ACV) policies pay replacement cost minus depreciation — the true 'indemnity' value of a used asset. Replacement Cost Value (RCV) policies pay the cost to replace at today's prices, which technically goes beyond strict indemnity; insurers charge a higher insurance premium for this broader benefit.
In commercial contracts and leases, indemnification clauses allocate responsibility for third-party claims between parties. A landlord requiring a tenant to 'indemnify and hold harmless' the landlord is shifting liability for tenant-caused losses to the tenant. These contractual indemnity provisions interact with commercial liability policies — which is why reviewing contract indemnity language alongside insurance coverage is essential for business owners.
◈ Worked example
- A 5-year-old laptop stolen from an office is valued under an ACV policy at $300 (original $1,200 minus depreciation) — the indemnity amount. A replacement-cost policy would pay $1,100 for a comparable new laptop.
- A construction contract indemnity clause requires the subcontractor to indemnify the general contractor for injuries caused by the sub's negligence on-site.
Common questions
The most-asked questions about Indemnity — answered straightforwardly.
What's the difference between ACV and replacement cost? +
ACV (actual cash value) pays the depreciated market value of the damaged item — true indemnity. Replacement cost pays what it costs to replace with a new comparable item. RCV policies pay more at claim time but carry higher premiums.
Does indemnity mean I can't profit from insurance? +
Correct. Receiving more from a claim than your actual financial loss is called unjust enrichment, which violates the indemnity principle. Insurers can seek recovery if overpayment occurred (subrogation).
Further reading
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