Indemnification
September 28, 2009
Indemnification is the process of compensating or indemnifying, when a loss occurs. The indemnity amount is paid by the indemnifying party, to the party who has suffered a loss. The person who pays may not be the one who is responsible for the occurrence of the loss. The compensation can be in the form of cash, actual repairs, replacing certain items or reinstatement.
The process of indemnification is at the root of any insurance policy. It is because of the assurance of indemnification that a person is willing to pay a premium on an insurance policy. Here the insurer will be the indemnifying party, and the insured will be the indemnified. Although the insurer is not responsible for the loss of the insured, he is liable to compensate the loss, as he is under contract of the insurance policy to do so.
When a person buys an insurance policy, the policy certificate will clearly state the loss for which he has to be indemnified. When the policy holder suffers that loss, he makes a claim for the insured amount, on the insurer. The insurer takes an amount called premium, from the insured to undertake the risk of loss. The premium amounts collected from the different insured people is used at the time of indemnification.
Indemnification is not limited to Insurance. It is an assurance in the form of a contract to compensate for a loss. Indemnification can also be a clause in a contract and will state the name of the party who will be responsible when there is a problem. Indemnification clauses in any contract have to be properly reviewed and studied before signing the contract. Indemnification can be for a contract being breached, law violation, violations in confidentiality, infringements of copyright and so on.
Usually an indemnification clause in a contract will be for general liability. This will assure a remedial measure in addition to the enforcement of law. It will also provide recovery of legal expenses if the matter goes to court. The indemnification clause can also be used for risk shifting in a contract.
In corporations, Indemnification provisions, provide protection to employees, directors and officers of the corporation. A shareholder of a company has limited liability in a corporation, and only when he becomes a director or officer he has additional liability. When an Indemnification provision is included in the Articles of Incorporation, the directors and officers are protected from extra liability.
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