Final answer:
An indemnity clause in a contract requires one party to compensate the other for certain losses or expenses. This contractual agreement is common in various types of contracts, including service agreements and insurance policies, where it serves to allocate risk between the parties.
Step-by-step explanation:
The concept you're referring to is known as an indemnity clause. This is a common provision in contracts that requires one party to compensate the other for any losses or expenses that they may incur, usually as a result of legal claims or actions from a third party. It's essentially a way to allocate risk between the parties involved. This type of clause can cover various scenarios and expenses, including legal costs, settlements, and judgement amounts.
For example, Company A might hire Company B to perform some service. The contract could include an indemnity clause whereby Company B agrees to indemnify (or cover) Company A for any losses arising from Company B's work, such as if Company B is negligent and causes damage or harm that leads to a lawsuit. This concept is also prevalent in insurance policies, where the insurer agrees to cover certain losses that the policyholder might incur, subject to the policy's terms and conditions, usually through deductibles and copayments.
To improve understanding, let's take a look at health insurance. With a typical health insurance plan, the policyholder might have a $20 copayment for each doctor's visit. In this case, the insurance company would cover the rest of the costs associated with that visit, subject to the terms of the policy.