Commercial Insurance

Every insurance policy is a contractual agreement between the insurance company and the policyholders. When you avail of insurance there is an agreement that legally binds you and the insurer on grounds of the coverage, terms, conditions, and responsibilities. Be it general insurance or life insurance, every insurance is contract indemnity because it has a contract that involves a consideration, which is also referred to as a policy premium. You need to make that premium payment in exchange for the promises of coverage that the insurance company makes.

Every Insurance policy – general insurance or life insurance, is a contract of indemnity and guarantee. Now, the question is which of the following is a contract of indemnity? Let’s learn more about the contract of indemnity and guarantee.

What is the contract of indemnity?

A contract of indemnity is a legal arrangement between two parties, wherein one party commits to reimbursing the other for any financial loss or damage they may incur as a result of a specified event within the contract’s timeframe. The other party pays the amount of consideration in return. The purpose of the contract of indemnity is to restore the financial position of the party that suffered a loss to its original position. The contract of indemnity includes a few important elements. Let us take a look:

  1. There are two parties involved in the contract of indemnity – the indemnifier and the indemnitee.
  2. The nature of the contract is bilateral. That means both the parties involved have certain obligations. As the indemnifier promises compensation for loss during a specified event, the indemnitee accepts to take rational steps. To minimize the loss, the indemnitee acknowledges the indemnifier’s commitment and agrees to cooperate in minimizing potential losses.
  3. This bilateral contract transfers the risk of potential loss from one party (indemnitee) to another party (indemnifier)

Reasons why general insurance is called contract indemnity

General insurance refers to as indemnity as it operates on the principle of indemnification. In general insurance contract, the insurance company promises to restore the financial position of the insured in case of loss. This occurs when the insured suffers damage or loss due to an unforeseen event specified in the contract terms. In return, the insured pays the consideration in the form of a premium for the general insurance policy.

Here are some important reasons for referring to general insurance as contract:

  1. General insurance is a contractual agreement between the insurance company and the insured. The contract outlines the obligations of both the parties involved in the agreement. The contract specifies the coverage limits, terms, and conditions, as well as the amount of consideration required to receive compensation.
  2. General insurance transfers the risk of potential loss from the insured to the insurance company in case of loss during a covered event. For example, if any covered perils damage the insured property in property insurance, the insurance company must compensate for the loss according to the policy limits.
  3. General insurance is called the contract of indemnity clearly based on the nature of the contract.

Why life insurance is not a contract of indemnity?

Not all insurance contracts are based on the contract of indemnity. life insurance contracts are different from general insurance contracts. Life insurance contracts are the contract of guarantee. Contracts are classified into different types based on the nature, purpose, and functions of the contract. 

In a life insurance contract, the insurance company guarantees a lump sum benefit or amount to the dependents of the insured party in case untimely demise of the policyholder.  Instead of measuring the loss and restoring the measured loss, life insurance compensates a predetermined fixed lump sum. There is no direct measurement of actual loss in a contract of guarantee. 


To sum up, general insurance products are based on the contract of indemnity concept where the insurance company indemnifies to pay for the actual loss suffered from any covered event in return for the premium paid by the insured. Having general insurance is extremely important for financial protection and to protect your home, health, and valued possessions in the event of unexpected loss.

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