Vis-à-vis Insurance is a contract of indemnity which majorly serves to protect the policyholder against uncertain events which might otherwise cause them severe financial harm. All insurance contracts other than life insurance policies are a type of indemnity contract.

The need for proper risk management planning is increasing with the growing complexities of today’s world in all aspects, especially in the business and corporate sectors. While the world is evolving technologically and otherwise, the possibilities of hazards have increased too therefore, the importance of insurance is increasing every day. To meet these demands, insurance brokers and providers are offering a bewildering variety of insurance policies to suffice the needs of people and businesses from different walks of life. From amongst these various options available to select the right one for yourself, one must know the essentials and exceptions attached to the principles of the policy, mainly the principles of indemnity and insurance.

How do risk management processes function?

Insurance policies and indemnity contracts are a crucial part of every organisation’s risk management processes. To understand the principle of indemnity, you need to understand the risk management process too. Here’s how risk management processes work:

1. Identifying the risks
The foremost step of every risk management process is the identification of risks. There are various risk assessment tools available for analysing and recording risks. As a part of the claims management and risk management practices, organisations usually hire professionals to avoid any errors.

2. Analysis and Measuremen
The next step of a good risk management process is to determine and analyse the likelihood and consequences of the possible risks.

3. Categorize the unacceptable
Risks must be categorized as manageable and non-manageable. The manageable risks must be monitored regularly in order to avoid mishappenings.

4. Mitigate or transfer the risks
The fourth step of the risk management process that most corporate insurance brokers consider is to take action against risks that cannot be avoided.

5. Contingency planning
In this step, risks that cannot be managed are considered. In this step, the ‘plan-B’ is also curated. This is the plan which is considered when the initial risk management plan fails.

6. Monitoring and Reviewing the risks
The steps involve keeping a record of your risks, maintaining related reports and making sure that other precautionary measures are taken care of.

Meaning of Contract of Indemnity

The term ‘indemnity’ in a literal sense means security or protection against any loss or compensation. A contract of indemnity is an agreement between the insurer and insured in which the insurer promises to cover the insured for any losses caused to him.

The objective of entering into a contract of indemnity is to protect and get protected against unanticipated losses.

There are two parties involved in a contract of indemnity or vis-à-vis Insurance:

1. The promisor or indemnifier:He is the one who promises to cover the losses.
2. The promisee or the indemnified or indemnity holder:He is the one whose losses are covered or who gets compensated for the losses.

Essentials of a contract of indemnity

1. Parties involved
There must be 2 parties necessarily involved in the contract namely the promisor and the promisee or the indemnifier and the indemnified.

2. The contract must be express or implied
The contract of indemnity may be made by spoken or written words i.e. express or inferred from the conduct of parties or circumstances of the particular case i.e. implied.

3. Rights that are important for the contract

• Rights of the promisee or the indemnity holder
• Rights to recover damages paid in a suit
• Rights to recover costs incurred in a defending suit
• Rights to recover sums paid under compromise

4. Commencement of Liability of Promisor or the indemnifier

• The indemnifier is not liable until the indemnified has suffered the loss

Indemnified can compel the indemnifier to cover up for his losses if the liability has occurred and can be proved.

Maximizing an indemnity clause

The main purpose of adding indemnity clauses to an insurance policy or taking up an indemnity contract is to shift the responsibility of risk to the insuring party or indemnifier.

The impact of the language of the indemnity clause on the end result

The contract’s language must be thoroughly evaluated. It must be evaluated precisely if there are any clauses which state very broad terms of risk transfer, the specific terms must be evaluated too. The parties entering the contract must make sure that the right indemnity language must be followed that complies with the jurisdiction in which the clause is to be interpreted. The parties must make sure that the contract clarifies and complies with the interests of both parties. It is paramount to ensure the right language is used and effective communication is established in order to understand the right intent of both parties.

What must you include when creating a contract’s indemnity clause?

The most trusted way to ensure the right level of clarity is to include or specify definitions of key terms or what they stand for in the context of the contract. Simplifying and defining the indemnity terms can allow a clear and precise interpretation of the clauses against the indemnity giving rise to the demand for indemnity.

Other than the right communication methods here are the other factors that must be addressed in an indemnity contract:

1. Specifications and limitations on the types of damages. Extra expenses such as attorney fees must be added as a recoverable cost. Consequential damages must also be mentioned along with fines and penalties.
2. The duration or time period of the contract
3. Including the type of event that can be a trigger for the obligation to indemnify
4. The indemnity clause must specifically state that it does depend on the viability of the entity granting the indemnity. Even if the indemnifier goes out of business, the contract may still be in effect

Since every indemnity contract and clause is different it is crucial for the indemnity contract to be read carefully. If the contract is not read and understood properly you might accept a huge amount of risk you never intended to take.

Contact Deinon Insurance Brokers LLC at infra-energy@deinon.ae for the best insurance solutions.