Learn more about what indemnification is in business.
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Indemnification’s definition is where one party compensates someone else for a loss, typically a third party’s loss. Indemnification’s business definition is often understood as a clause in a contract where one party agrees to compensate another party if something happens to a third party. This is an “indemnification clause.”
The definition of indemnification requires that the party who agrees to indemnify the other party pays any costs that the other party would otherwise have to pay if something goes wrong. This is usually due to something that the indemnified party does to a third party. For example, your car insurance company agrees to pay any costs you may incur if you have an accident with a third party. Your car insurance company indemnifies you in this situation.
Indemnification benefits the party who is indemnified. In the case of car insurance, if you’re insured, your insurer will pay accident damages. Plus, your car insurance company will also defend you in a lawsuit. The car insurance company assumes your legal liability and pays costs you otherwise would have to pay. You benefit from indemnification.
One of the indemnification disadvantages is if you are the party providing the coverage for the other party. Indemnification’s meaning is that you will have to cover the other party’s potential liability and costs. This can be expensive. You may want to consider negotiating for a more significant benefit, given that you could be on the hook for this party’s actions. Or, you may want to negotiate a limited indemnification. This way, you would indemnify the other party only if a specific thing happens.
Understanding indemnification also explains indemnification’s other names. Indemnification’s definition is often expressed as holding harmless. This means that by one party assuming liability for another party, they essentially agree to hold that other party harmless for what they do. Thus, an indemnification clause is also sometimes called a hold harmless clause.
Indemnification examples help explain indemnification.
Let’s say that you hire a general contractor to build a new home. The general contractor contracts an electrician to do the electrical work in the new home. The electrician installs the wiring negligently. Then, the house catches on fire due to negligent wiring.
Who would be responsible? You will have to look at the agreement between the general contractor and electrician. Suppose the general contractor agreed to indemnify the electrician. In that case, the general contractor will have to pay your damages even though the electrician caused them.
Indemnification is a part of many people’s lives through their insurance. For example, you have homeowner’s insurance, and someone slips and falls on your front porch. If that person sues you, your homeowner’s insurance likely indemnifies you. Because of indemnification, your homeowner’s insurance will defend you and pay the lawsuit costs of this slip and fall injury.
Indemnification is defined as a scenario in which one party pays the costs and liabilities associated with another party’s actions. A car insurance contract explains indemnification: your insurance company indemnifies you if you are liable to another party in a car accident.
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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.