Updated: Aug 20, 2021

An agreement whereby one person agrees to make good any loss suffered by a party to a contract to which he himself is a stranger. For example, A buys goods from B on credit, C states that he will see that B is paid. C indemnifies B – he takes primary liability, unhke a guarantor, who takes secondary liability, e.g. C pays B if A does not. The most common contracts of indemnity are found in the field of insurance. An insurer effectively indemnifies the person taking out a policy against loss of a specified asset. In this instance. however, the agreement is to reinstate the property insured, i.e. put the claimant in the same position, as far as possible, as he was before. No definite sum of cash is involved but the amount for which the asset is insured is usually the cost of replacing it. In a time of inflation it is necessary to increase the sum assured in fine with rising replacement costs and some insurance companies provide for this in their policies. Whatever the total sum insured, the insurer will only make good the actual loss, provided there is no question of under-insurance; in that case only a proportion of the loss will be made good.

Reference: The Penguin Business Dictionary , 3rd edt.

Sources & references
Risk disclaimer
James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.