The Webster dictionary defines indemnify as ``to protect (someone) by promising to pay for the cost of possible future damage, loss or injury``. The primary purpose of insurance is "indemnification" for a loss that has occurred to help someone recover financially. Ideally this means the same financial position immediately prior to the damage, loss or injury. Here is some indemnification concept to be familiar with.
Self-insured - Individuals and business owners will often opt to "self-insure" for part of potential losses. This basically means they are aware a certain amount of losses can feasibly be absorbed before they are put in a bad financial position. This concept is not new and to this day remains the most difficult part of insurance to get right.
Deductible - The most common form of self-insurance. Insurance consumers will opt for higher deductibles to save money on insurance premiums. Deductibles must be paid before an insurance company will cover the remaining losses. For example, a $1,000 deductible on a home is common and encourages consumers to self-insure small losses under $1,000.
Co-insurance - Is one of the most confusing and miss-understood concepts in insurance. The co-insurance clause is designed to make consumers self-insure for underreporting values. Since this clause is almost on every insurance policy we will explain it in greater detail in its own post.
Fraud - One of the costliest crimes to the insurance industry. Fraud occurs during indemnification when a consumer fakes a claim or fabricates damages, losses or injuries. Fraud costs consumers millions of dollars a year and is unfortunately hard to catch. For example, if some stages a car accident or claims to have had four 3D televisions when they only had 1.
Indemnification is a concept we will continue to explore in greater detail as we explain other material in greater details.
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