Insurance vs Indemnity
Indemnity and insurance explain two very similar concepts that are so alike to each other, they are easily confused. Indemnity and insurance both explain a situation in which one party takes measures to guard against any financial losses that maybe suffered so that, he may arrive at the financial status he was before the event/accident occurred. The following article seeks to explain each concept clearly and provides a clear outline of their subtle differences.
What is Indemnity?
Indemnity is the obligation that one party holds in paying compensation to another party that suffered losses. A classic example would be an indemnity contract that was taken out by an owner of an amusement park to pay compensation to any person who was injured at the park.
Indemnity contracts are also used by medical professionals, to pay compensation to any patient who may suffer from medical malpractice.
What is Insurance?
Insurance is the guard against uncertain losses. An insurance policy will be taken by an individual who wishes to guard themselves against the occurrence of a specific event and the losses that may follow by making a periodic payment to an insurance company called an insurance premium. In case the event occurs the insurance company will compensate the insurance policy holder, restoring their financial standing back to the position it was before the loss occurred. Therefore, taking out an insurance policy is essentially transferring a risk from one party to another in exchange for a payment made.
Insurance is taken out against a variety of risks; some forms of insurance include vehicle insurance, health insurance, life insurance, home insurance, credit insurance, etc. An example of insurance is vehicle insurance, where in case the insurance policy holder faces an accident and his vehicle gets damaged, he will be paid compensation for damages to his vehicle, so that his vehicle can be restored.
Insurance and Indemnity
Insurance and indemnity are quite similar to each other and operate on similar concepts of restoring the party that suffered a loss or injury back to their original position. The existence of indemnity insurance contracts, which combine these two concepts, make understanding the difference even more difficult. However, Insurance can be seen as a periodic payment that is made to guard against any losses suffered, whilst indemnity is a contract between two parties for which the injured party will receive compensation for losses.
Summary
Insurance vs Indemnity
• Indemnity and insurance both explain a situation in which one party takes measures to guard any financial losses that maybe suffered to that he may arrive, at the financial status he was before the event/accident occurred.
• Indemnity is the obligation that one party holds in paying compensation to another party that suffered losses.
• Taking out an insurance policy is essentially transferring a risk from one party to another in exchange for a payment made.
• Insurance can be seen as a periodic payment that is made to guard against any losses suffered, whilst indemnity is a contract between two parties for which the injured party will receive compensation for any losses.