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An indemnity is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnitor (A) may or may not be responsible for the loss suffered by the indemnitee (B). Forms of indemnity include cash payments, repairs, replacement, and reinstatement.
General & legal meaning
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Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. (July 2009)
As a legal concept, it has a more specific meaning, namely, to compensate another party to a contract for any loss that such other party may suffer during the performance of the contract. For instance, compensation connotes merely a sum paid to make good the loss of another without regard to the payer's identity or their reasons for doing so. As the following paragraphs should explain, an indemnity is a sub-species of compensation, in the same way that Damages and reparation are.
The obligation to indemnify differs from the obligation to pay compensation, or make reparation, in that an obligation to indemnify is a voluntary obligation. If C crashes into B's car and damages it and the crash is due to C's negligence, most legal systems will impose liability upon C to pay B for the damage caused. C's obligation to B arises by force of law regardless of whether C subjectively wishes to compensate B. This is not, therefore, a situation of indemnity; the relationship between B and C is involuntary. In legal terms, it is a case of tortious (common law) or unlawful act (civil law) liability.
But, if A had a contract with B under which A agreed to pay for any damage to B's car, then A paying B would be obligatory (even if A subjectively regretted the contract at this point). In legal terms, A's liability is contractual and the sum paid is an indemnity. The contract just described between A and B is of course one of automobile comprehensive insurance.
The first paragraph stated that the indemnifying party (A) may also be the party responsible for the loss. This is because although A will probably have a legal duty to compensate B (depending on the rules for damage wrongfully caused in the relevant legal system), A may also have a contractual duty to compensate C. Such indemnity clauses can be found in many contracts aside from those specifically for insurance. For instance, (staying with the automobile theme), a car rental contract may stipulate that the renter will be responsible for damage to the rental car caused by the renter's reckless driving. In this case, the renter will indemnify the rental company.
An obligation to indemnity can also be distinguished from a guarantee granted by one party in regard to the potential debts of another. For example A might agree to stand guarantor (or surety) for her son C (an impecunious law student) so that if C cannot afford to pay his rent to B (his canny landlord), A will be obliged to pay for him. Here, C is the one primarily responsible for payment of the rent. A's liability is only ancillary. The liability of an indemnifier, properly so-called, is primary. This distinction between indemnity and guarantee was discussed as early as the eighteenth century in Birkmya v Darnell. In that case, concerned with a guarantee of payment for goods rather than payment of rent, the presiding judge explained that a guarantee effectively says "Let him have the goods; if he does not pay you, I will." By contrast, an indemnity is like saying "Let him have the goods, I will be your paymaster."
Indemnity in particular legal systems
Under section 4 of the Statute of Frauds 1677, indemnity clauses must be constituted in writing.
In England and Wales an "indemnity" monetary award may form part of rescission during an action of Restitutio in integrum. The property and funds are exchanged, but indemnity may be granted for costs necessarily incurred to the innocent party pursuant to the contract. The leading case is Whittington v Seale, in which a contaminated farm was sold. Due to the contract, buyers renovated the Real estate and, due to the contamination, incurred medical expenses for their manager who had fallen ill. Once the contract was rescinded, the buyer could be indemnified for the cost of renovation as this was necessary to the contract, but not the medical expenses as the contract did not require them to hire a manager. Were the sellers at fault, damages would clearly be available.
The distinction between indemnity and damages is subtle, but they may be differentiated by considering the roots of the law of obligations. How can money be paid where the defendant is not at fault? The contract before rescission is voidable but not void, meaning that, for a period of time, there is a legal contract. During this time both parties have legal obligation. If the contract is to be voided ab initio the obligations performed must also be compensated. Therefore the costs of indemnity arise from the (transient and performed) obligations of the claimant rather than a Breach of obligation by the defendant.
Indemnity insurance compensates the beneficiaries of the policies for their actual economic losses, up to the limiting amount of the insurance policy. It generally requires the insured to prove the amount of its loss before it can recover. Recovery is limited to the amount of the provable loss even if the face amount of the policy is higher. This is in contrast to, for example, life insurance, where the amount of the beneficiary's economic loss is irrelevant. The death of the person whose life is insured for reasons not excluded from the policy obligate the insurer to pay the entire policy amount to the beneficiary.
Most business interruption insurance policies contain an Extended Period of Indemnity Endorsement, which extends coverage beyond the time that it takes to physically restore the property. This provision covers additional expenses that allow the business to return to prosperity and help the business restore revenues to pre-loss levels.
Freeing of slaves and indentured servants
Slave owners suffer a loss whenever their slaves or indentured servants are granted their freedom. Slave owners may be paid to cover their losses.
When the slaves of Zanzibar were freed in 1897, it was by compensation since the prevailing opinion was that the slave owners suffered the loss of an asset whenever a slave was freed.
In the 1860s in the United States, U.S. President Abraham Lincoln had requested many millions of dollars from Congress with which to pay slave owners "for the loss of their property." On July 9, 1868, Section IV of the Fourteenth Constitutional Amendment dismissed all of the claims that slave owners had been injured by the freeing of the slaves.
In 1807-08, in Prussia, statesman Baron Heinrich vom Stein introduced a series of reforms, the principal of which was the abolition of serfdom with indemnification to territorial lords.
Costs of war
The nation that wins a war may insist on being paid compensations for the costs of the war, even after having been the creator of the war.
- Following the Sino-Japanese War of 1894-95, the Treaty of Shimonoseki required that China pay Japan the sum of 200,000,000 taels (or liangs).
- China incurred an indemnity which resulted from massacres of foreigners during the Boxer Rebellion. The payment of 450,000,000 Haikwan taels, or $330,000,000 became necessary.
The indemnity lottery
The term was created by the Brazilian jurist Leonardo Castro. The article was published in BDJUR (the Brazilian Superior Court of Justice library). The term means that in civil cases of indemnity you can never predict the result (sentence).
- (1704) 1 Salk 27.
- See also: Mountstephan v Lakeman (1871) LR 7 QB 196.
- (1900) 82 LT 49
- Furmston, M, Law of Contract, ed11 (2001).
- Adjusting Today The Extended Period of Indemnity Endorsement
- Fourteenth Amendment and related resources at the Library of Congress; National Archives (USA): 14th Amendment