Definition of "Indemnify"

Generally speaking, indemnity defines a legal principle and an ensuing agreement to calculate the amount of compensation a party is entitled to resulting from a specific financial loss they suffered. The payment or indemnification covers an individual’s or business entity’s costs for a destroyed or damaged property or any other asset.

What does indemnity mean in financial terms?

In a property and casualty contract, the purpose is to return the same financial position to an insured party before suffering a loss. But the insured should not be able to benefit from harm or destruction of effects, nor should they be in a worse financial position after the given misfortune.

Life insurance is different from indemnification.

In life insurance, the situation is entirely different. By paying a single premium, the beneficiary of an insured party can enjoy a more advantageous financial remuneration at the death of an insured than before the decease. Nevertheless, the earnings of a predetermined sum upon the insured’s demise do not qualify a life insurance policy as an indemnity agreement. In the case of hospital indemnifications and other health insurance plans, the estimation of benefits is designed so that the insured cannot profit from an illness.

What do indemnification clauses imply in contract law?

An indemnification clause determines the take on another party’s responsibility if a particular event happens, such as a third party filing a claim against one of them. Let’s take the upcoming scenario. Tom hires Jack to be his salesperson. Jack works for a sales commission selling Tom’s products. Jack asked Tom to repay him for legal expenses if a client files a lawsuit against Jack based on gross negligence or presumed misconduct in a mutually signed contract. Thus, Jack’s objective is to get protection by demanding Tom take responsibility. In other words, Tom indemnifies Jack or covers his back.

In the absence of the given indemnification clause, the sole responsibility falls on Jack’s shoulders if a third party sues him. The supervisor shall be held responsible with a signed indemnification agreement. Besides, Tom has to pay a lawyer for Jack, the defendant’s legal protection.  

What is indemnification in real estate?

Let’s see how someone can indemnify another party in real estate and how real estate indemnity agreements occur. One party guarantees that they would protect the other from capital loss or lawsuit. Usually, a homebuyer indemnifies the seller in exchange for a discount on the initial price or for buying their real estate at a below-average price.

You can indemnify a seller from future accountability.

Indemnification in real estate defines the buyer taking full responsibility for what should be the seller’s fault otherwise. For example, you agree to purchase a property with minor flaws caused by the seller. The previous owner might have felled a tree which crashed into the roof. In short, you have conceded to be responsible for any further problems caused by the faulty rooftop done to you or a third party by signing the indemnification agreement. In other words, you indemnified the seller and relieved them from additional accountability.

Taking over responsibility for a past offense

Suppose a land seller damaged a plot by throwing harmful waste on it ten years ago. People now live in apartments built on the said damaged and toxic plot. They can sue the original landowner because no one cleared away the contaminated trash, and it’s still spreading infection. Typically, the seller and former owner must still assume responsibility for their deed. However, you as a buyer can indemnify the seller by signing an indemnity agreement. Therefore, you take over the seller’s accountability. Unwell residents will sue you instead of the genuine perpetrator. 

Conclusion

Before signing an indemnification clause, make sure to read the contract carefully! Check for what you’re about to indemnify a person. Study whether the indemnification includes a claim, financial accountability for a product, attorney’s fees, court expenses, or taking upon interests or mortgage payments. Once you indemnify someone, you will have to pay for every term defined in an indemnification agreement. Also, such clauses have an established deadline, setting a period or timeframe until the parties concerned can enforce them.

Contact financial advisors and top-rated local real estate agents to learn more about the perils you expose yourself to by signing an indemnification contract!

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