What Is an Indemnity Benefit Contract?

Indemnity benefit insurance pays when a covered loss occurs.

Indemnity benefit insurance pays when a covered loss occurs.

The typical indemnity benefit contract is an insurance coverage contract for health or other types of benefits. It can be structured in many different ways to cover a range of costs or losses. Checking a few basic features of any insurance coverage will let you know whether or not the coverage is an indemnity benefit contract.

Indemnity Payments

In legal terms, to indemnify is to pay for a loss, and an indemnity contract pays following a specific event or cost (the loss) has occurred. Many kinds of insurance policies pay on an indemnity basis. For example, if you wreck your car, your auto insurance company indemnifies you for the loss by paying for the repairs or paying you for the value of the car if the vehicle was totaled.

Contract Benefits

The benefits section of an indemnity benefit contract includes which losses or costs are covered, at what rate the indemnity is paid, and to whom the payments will be made. An indemnity benefit contract for dental insurance would list which dental procedures qualify for indemnification, how much is paid for each procedure, and whether payments are made directly to the dentist or to the patient after the dental work is completed. The benefits of a specific contract are the core of what the contract covers and how indemnity payments will be structured and paid. The contract might be an insurance policy issued by an insurance company or just an agreement between two parties where one will pay if the other incurs a covered loss.

Types of Indemnity Benefit Contracts

Most types of insurance plans relating to health costs can be structured as indemnity benefit plans. Coverage might include health insurance, disability insurance, workers' compensation insurance, dental insurance and supplementary insurance plans. Any plan that pays after a specific event -- such as a workplace injury or having a tooth pulled -- is an indemnity benefit contract. Insurance coverage that pays whether or not benefits are used, such as an HMO plan, is not part of an indemnity benefit contract.

Advantages and Disadvantages

One advantage of an indemnity benefit contract is that it can be structured to cover any type of expected loss. Both parties to the contract know what will be paid under what circumstances. One problem with an indemnity benefit contract is that it can be a complex process determining whether or not a loss is covered. Another disadvantage is if the indemnity does not cover the losses incurred.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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