Indemnities versus Insurances: Do you understand the difference?

Indemnities versus Insurances: Do you understand the difference?

Indemnities and insurance both guard against financial losses and aim to restore a party to the financial status they held before the event occurred. However, it’s important that Contract Managers understand the significant difference between the two to help protect their business.

Indemnities

Indemnities are used in commercial contracts to allocate risk between contracting parties, generally by altering the common law or statutory rights of the parties, with one party accepting some or all of the risk of loss that the other party may suffer in a given situation.

There are six common types of indemnity clauses:

  1. Bare indemnities: Organisation indemnifies the supplier for all liabilities or losses incurred in connection with specified events without specific limitations
  2. Limited indemnities: Organisation indemnifies the supplier against losses except where they are incurred as a result of the supplier’s own actions
  3. Reverse indemnities: Organisation indemnifies the supplier against losses incurred as a result of the supplier’s own actions
  4. Party/party indemnities: Organisation and the supplier indemnify each other for losses caused by the indemnifier’s breach of contract
  5. Third party indemnities: Organisation indemnifies the supplier against claims by a third party
  6. Financing indemnities: Organisation indemnifies the supplier against losses incurred if a third party fails to honour the financial obligation to the supplier

Insurances

People are generally more familiar with the concept of insurance. An insurance policy transfers a risk from one party to another in exchange for payment. It guards the insured party against any losses for the insured risk. Business insurance generally focuses on assets, revenue, liabilities and personnel, with many products designed to meet the needs of specific industries.

If you agree to an indemnity clause, it’s a good idea to investigate if there is insurance coverage available for the risks likely to be covered by the clause.

In any case be aware that a transfer of risk will always come with a price tag.

At a glance

  • indemnities and insurance both guard against financial losses
  • indemnities are used to allocate risk between contracting parties, generally by altering the common law or statutory rights of the parties
  • an insurance policy transfers a risk from one party to another in exchange for payment
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