Contract of Indemnity: The Real Meaning of Insurance

A Contract of Indemnity: The Real Meaning of Insurance

Insurance means different things to different people. Wikipedia (via multiple sources) once defined insurance as:
The equitable transfer of the risk of a loss, from one entity to another in exchange for money. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

At its heart insurance is simply the transfer of risk for a premium.

An insurance policy is a contract of indemnity which means an obligation by a person (indemnitor) to provide compensation for a particular loss suffered by another person (indemnitee). Indemnities form the basis of many insurance contracts; for example, a car owner may purchase different kinds of insurance as an indemnity for various kinds of loss arising from operation of the car, such as damage to the car itself or medical expenses following an accident. In an agency context, a principal may be obligated to indemnify their agent for liabilities incurred while carrying out responsibilities under the relationship. While the events giving rise to an indemnity may be specified by contract, the actions that must be taken to compensate the injured party are largely unpredictable and the maximum compensation is often expressly limited. The question is, how does the academic definition of insurance translate into the real world?


The true essence of insurance is claims handling.

Much like the Pulp Fiction character Mr. Wolfe in Quinton Tarantino’s famous movie, when you pick up the phone and call for help after a calamity has happened the peace of mind in knowing that assistance is on the way is what trust is all about. The trust in a relationship with your agent and your insurance carrier is at the heart of coverage.
At Rolfs Insurance Services our goal is to build trust through the strength of knowledge delivered with integrity to provide protection. If you have friends or family that may be able to utilize our services with this underlying philosophy kindly forward a copy of this newsletter to them. It is our purpose and pleasure to help others while providing peace of mind to those who do business with us.

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