"Indemnity may arise by contract, by statute, or by the nature of the relationship itself. An obligation to indemnify means an obligation to protect against or keep free from loss, to repay for what has been lost or damaged, to compensate for a loss."
In 1986, the British Columbia Court of Appeal in Arklie v Haskell adopted these words in regards to the legal term indemnity:
"To restore the victim of a loss, in all or in part, by payment, repair or replacement.
"To save harmless; to secure against loss or damage; to give security for the reimbursement of a person in case of an anticipated loss falling upon him.
"To make good; to compensate; to make reimbursement to one of a loss already incurred by him.
"In my opinion, the concept of indemnity has central to it the idea of compensation, of making good, of paying moneys to a person, to reimburse them for losses sustained."
Traditionally, the indemnity contract sets up another party from whom a creditor
may collect or demand performance concurrent with the primary debtor. For example, an indemnitor
(the person who agrees to indemnify) to a mortgage may be asked by the bank to contribute to the payments from the get-go; even before or in the absence of non-payment by the primary debtor.
Contrary to a guarantee, it provides a primary debtor with a "side-kick", a partner; a person who stands beside him and from whom the creditor can demand payment; from either the primary debtor or, at the creditor's option, from the indemnitor; or both!
An indemnity agreement does not require default or breach of contract by the primary debtor. The third-party can demand payment or performance from the indemnitor at any time during the primary debtor's contract.
In National Bank of Tifton v Smith (USA, 1914):
"In a contract of indemnity the indemnitor, for a consideration, promises to indemnify and save harmless the indemnitee against liability of the indemnitee to a third person, or against loss resulting from such liability. The contract of the indemnitor is an original undertaking. The indemnitor is liable only to the indemnitee and his assigns; and unless he has stipulated for it, he has no remedy over against the party for whose benefit the contract was made."
With the exception of life insurance contracts, insurance
contracts are the ultimate indemnity contracts, where the insurer agrees that in the event of the loss of the insured item of property, the insured person will be put back in the same position as if the event had not occurred, or compensated accordingly.