Important insurance terms can be misunderstood and cause problems with claims. This is especially true when several terms that mean different things are similar in wording. Certain types of professionals may be required to have an insurance policy that offers indemnity to principals. Confusing this with the general principle of indemnity might result in inadequate coverage.
Principle of Indemnity
All insurance is based on the principle of indemnity, which states that you are entitled to be made financially whole by an insurance settlement without realizing a profit. In other words, if you bought your car for $25,000, but it is only worth $11,000 at the time it is destroyed, your insurance policy pays you $11,000, the current value of the car. If you received more money than this, you would see a financial gain because you received more than the value of the lost property.
Indemnity in Liability
Liability insurance deals with non-property losses such as physical injuries, lost wages and personal injuries such as slander. Liability settlements still work on the principle of indemnity, but the value of the damages involved is often more subjective. For example, an advertising injury case might allege that one business's disparaging of another's product caused the second business's profit to fall. The extent of this lost profit is unknown, because the profit was never realized in the first place. However, a settlement is designed to indemnify the injured business by restoring the anticipated lost profit.
In business, a principal is someone who can be held vicariously liable for another person. For example, if an employee harms a customer during the course of his employment, the employer can be sued as a result, because the employee was representing the business when the incident occurred. In this case, the employer is the principal. Other common principal relationships include managers to agents and general contractors to subcontractors. If a real estate agent omits information that costs a customer money, for example, the agent's managing company can be sued as a result.
Indemnity to Principal
An indemnity to principal clause in an insurance policy extends liability coverage to a principal if he is sued as a result of another person's actions. Because principals are exposed to vicarious liability, they often require their subordinates to carry insurance that extends protection to them in the event of a lawsuit. A policy with an indemnity to principal clause triggers coverage for the listed principal when he is named in a liability suit involving the insured person.