Indemnity agreements, also known as indemnity clauses, play an integral role in contracts. That's because they are designed to punish the nonperforming party and reassure the damaged one they will be reimbursed for losses caused by the errant entity. Indemnity clauses are included in contracts as a way of discouraging parties from breaching the underlying contractual agreement.
What is indemnity
Indemnification is protection against loss or damage. When a contract is breached, the parties look to its indemnity clause to determine the compensation due to the aggrieved party by the nonperformer. The point is to restore the damaged party to where they would have been if not for the nonperformance.
Another type of indemnity is loan indemnity. In the B2B world, loan indemnity is a valuable protection against the sudden inability to repay a mortgage or loan. For example, if a borrower suffers a disabling event that impairs their ability to pay their secured debt, like a mortgage, their loan indemnification clause kicks in to pay the debt.
In legal terms, indemnity requires a nondelivering entity to compensate the aggrieved party for losses it incurred or expects to as a result of the nonperformance. An indemnity clause can also act an as exemption from liability from damages, so the wording of the agreement is extremely important.
Indemnity and contracts
There are numerous contractual scenarios that could benefit from having an indemnity clause as part of the agreement. They include:
- Commercial contracts
- Supply agreements
- Loans
- Leases
- Licensing agreements
Promissory notes can also include an indemnity agreement, triggered by the loss, theft, destruction, or damage to the note. Adding an indemnity agreement to a promissory note requires the borrower to execute and deliver a replacement promissory note if the original note is lost, destroyed, stolen, or damaged. Such an agreement protects the noteholder's ability to enforce the loan.
An indemnity agreement also alleviates the borrower of all financial liability for executing a new promissory note to replace the one that was lost or damaged. It assures the borrower that no one will try to enforce both the original note and the new note and that the borrower will not have to pay anything in connection with the creation and execution of the new note.
If you already have a signed promissory note that has been lost or damaged, you can prepare a separate affidavit of lost promissory note and indemnity agreement that contains a promissory note indemnity agreement. An affidavit is a written statement that is made under oath and is therefore legally binding on the party that signs it.
Promissory notes with hold harmless indemnity agreement
To anticipate the possibility of a promissory note becoming lost or damaged, it is a good idea to include an indemnity agreement in the note itself. Such a provision also requires the borrower to execute a replacement note if the original is lost or damaged.
If a promissory note does get lost or damaged, it will be necessary for the noteholder to execute an affidavit of lost promissory note and indemnity agreement.
The affidavit will be a statement setting forth the terms of the original note and the details of how it was lost or damaged and including the type of indemnity agreement mentioned above. It must be signed in the presence of a notary public.
You don't need to be concerned about how to write an affidavit, as the affidavit of lost promissory note and indemnity agreement can be completed with the assistance of an attorney.
FAQs
What is Indemnity? The word indemnity means security or protection against a financial liability. It typically occurs in the form of a contractual agreement made between parties in which one party agrees to pay for losses or damages suffered by the other party.
What is indemnity explained simply? ›
Indemnity is a type of insurance compensation paid for damage or loss. When the term is used in the legal sense, it also may refer to an exemption from liability for damage. Indemnity is a contractual agreement between two parties in which one party agrees to pay for potential losses or damage caused by another party.
Why is indemnification important? ›
Indemnification is protection against loss or damage. When a contract is breached, the parties look to its indemnity clause to determine the compensation due to the aggrieved party by the nonperformer. The point is to restore the damaged party to where they would have been if not for the nonperformance.
What is indemnity with an example? ›
In an indemnity agreement, one party will agree to offer financial compensation for any potential losses or damages caused by another party, and to take on legal liability for whatever damages were incurred. The most common example of indemnity in the financial sense is an insurance contract.
What best describes indemnity? ›
Indemnity can be defined as a contractual obligation to compensate an individual or business for damages or losses they experience.
Why is the principle of indemnity important? ›
The principle of indemnity governs that an insurance contract compensates you for any damage, loss or injury caused only to the extent of the loss incurred. Insurance contract ensures that the insurer does not make a profit in the event of an incurred loss.
What is right to indemnity in simple words? ›
2. Right to Indemnity: As per section 145, in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the the principal debtor whatever sum he has rightfully paid under the guarantee but no sums which he has paid wrong fully.
Is indemnity good or bad? ›
There's nothing inherently wrong with having an indemnity that can apply to claims between the parties—if that's what the parties intend. But if the parties want the indemnity to apply only to third-party claims, they can say so in the contract.
Why do you want an indemnity? ›
An indemnity policy can be purchased from specialist legal insurers to cover various types of risks or property defects. It protects the purchaser from a reduction in value as a result of the potential issue.
What is the need for indemnity? ›
The claim for indemnity or indemnification arises when a party (indemnifier) promises to protect another party (indemnity holder) from any kind of loss, cost, expense, damage or any other legal consequences caused by the conduct of the indemnifier or any third party.
Indemnity is a contractual obligation where one party promises to compensate for the potential loss or damage incurred by another party. A guarantee is a legal promise made by a third party to cover a debt or obligation of another party if they fail to fulfill their obligation.
What is the purpose of the contract of indemnity? ›
A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity.
What is the rule of indemnity? ›
In the indemnity clause, one party commits to compensate another party for any prospective loss or damage. More common is in insurance contracts, in exchange for premiums paid by the insured to the insurer, the insurer offers to compensate the insured for any potential damages or losses.
What does indemnity cover? ›
Indemnity insurance is a type of insurance policy where the insurance company guarantees compensation for losses or damages sustained by a policyholder. Indemnity insurance is designed to protect professionals and business owners when found to be at fault for a specific event such as misjudgment.
What is the obligation of indemnity? ›
In contract law, an indemnity is a contractual obligation of one party (the indemnitor) to compensate the loss incurred by another party (the indemnitee) due to the relevant acts of the indemnitor or any other party.
What is the purpose of an indemnity form? ›
An indemnity agreement is a contract that protects one party of a transaction from the risks or liabilities created by the other party of the transaction. Hold harmless agreement, no-fault agreement, release of liability, or waiver of liability are other terms for an indemnity agreement.
What does it mean for someone to indemnify you? ›
To indemnify, also known as indemnity or indemnification, means compensating a person for damages or losses they have incurred or will incur related to a specified accident, incident, or event.
What is the purpose of an indemnity plan? ›
With an indemnity plan (sometimes called fee-for-service), you can use any medical provider (such as a doctor and hospital). You or the provider sends the bill to the insurance company, which pays part of it. Usually, you have a deductible—such as $200—to pay each year before the insurer starts paying.
What is the responsibility of the indemnity? ›
Hence, indemnities are also referred to as 'hold harmless' agreements. Indemnities are contractual agreements that provide compensation for losses, damages, or liabilities sustained by another party. When you are indemnified, you are absolved from the responsibility of losses incurred during a mishap.
