Introduction to Indemnity & Insurance
Reference
September 1, 2022
- What is an indemnity and why do we need it in agreements?
Indemnification refers to the act of “protecting against or keeping free from loss.” When party A agrees to indemnify party B, party A is agreeing to make party B whole again in the event that it suffers a loss. Practically speaking, indemnity provisions are used by parties in a contract to shift and manage risk.
When the University enters a contract, it is important that all parties involved understand who will be financially responsible for losses if something goes wrong. Indemnity provisions in a contract are an important means of clarifying these responsibilities as they relate to each side.
While a party can still sue another party for damage or loss without an indemnity provision, indemnity clauses allocate risk in advance. Indemnity clauses are also beneficial because they can include reimbursement of legal costs (ie: legal costs incurred as a result of defending a claim will be covered by the indemnifying party).
- What is mutual indemnity?
In an ideal scenario (from a risk perspective), the University would require its counterparty to accept all of the risk resulting from the negligence or wilful mistakes of employees from either side. However, understandably, other institutions will usually be unwilling to take on this burden alone. A unilateral indemnity may be appropriate in arrangements where one party is responsible for carrying out all duties (and, for example, the University’s only obligation is to pay).
For the majority of the agreements that the University enters into, the University will agree to a mutual indemnity provision which provides that each party will protect the other (or, in other words, indemnify them) against losses that it causes (ie: its employees, agents, directors, etc).
- Insurance & Indemnification
“An indemnity is only as strong as its indemnitor”
In other words, an indemnity is of little or no use if the party providing the indemnity does not have the resources to fulfill the obligation. It is typical for indemnity provisions in agreements to be followed by insurance provisions, whereby the indemnifying party confirms that it has an insurance policy in place to cover the losses for which it may be responsible. Insurance requirements in a contract are a way of ensuring that each party will be able to indemnify the other up to a certain amount.
- Why do we need insurance? And why do we need the other party to have insurance?
Insurance provides financial protection in the event of a claim for damages or loss that is determined to be caused by the University or someone for whom University is responsible. We need other parties to a contract to have insurance so that if there is damage or loss that is caused by the other party (or someone for whom the other party is responsible) then we can have assurance that they will have adequate financial resources to compensate the University for those damages or losses.
- What are the different types of insurance that the University has? And who is protected by it?
Information about the University’s insurance coverage is available online at www.insurance-risk-mgmt.utoronto.ca.
