What Is Period Of Indemnity: Definition And Examples

What Is a Period Of Indemnity?

The period of indemnity refers to the duration of time during which benefits are payable under an insurance policy. It is also used to indicate the time frame within which indemnity or compensation is payable under a business interruption policy. The term of indemnity is usually the most important factor in calculating the business interruption loss.

• Understanding Period Of Indemnity

Indemnity is a legal agreement in which a firm undertakes to compensate for financial losses and damages caused by another party or occurrence. Insurance contracts generally include indemnification clauses in which the insurer commits to compensate the policyholder or insured for any financial losses or damages to the assets covered by the policy.

In return, the insurance company receives the policyholder’s monthly premiums. If necessary, the policyholder may file an insurance claim, which is a request to the insurer for financial compensation for a covered loss. When an insurance claim is submitted due to a loss, the insured reimburses the policyholder for all associated costs.

For example, a homeowner with a homeowner’s insurance policy would pay monthly premiums to the insurer in exchange for financial protection in case of a natural disaster. If the home is damaged by fire, the insurance company will cover the costs of repairing and restoring it to its original condition. The indemnity period is the time frame during which the insurance will pay the contractors or homeowner for repairs and restoration.

An indemnity can also be utilized in the corporate environment to protect a party against financial loss that is covered under the policy’s provisions. For example, an indemnity is typical among members of a company’s board of directors, who supervise the company’s direction and pick the CEO.

The board members would be financially protected, which means they would not be personally accountable if a lawsuit or financial loss occurred during their tenure. In the event of a lawsuit, the insurance coverage would kick in and cover any associated costs.

The period of indemnity is the amount of time the insurance company is required to make payments to cover the damages covered by the policy. Typically, an indemnity period will have a time restriction specified in the policy, such as 12, 24, or 36 months. Indemnity insurance payments would be made in cash or to parties due money as a consequence of a claim.

• Extended Period of Indemnity

An indemnity period can be prolonged so that the policy covers damages incurred after the event and throughout the restoration time. Business interruption insurance policies sometimes include an extended period of indemnification. Business interruption insurance compensates a company for revenue or income lost as a result of damage to its premises.

For example, if a corporation has a natural disaster, such as a fire, its property insurance coverage will cover the cost of repairs. The business interruption insurance would cover the revenue loss due to a lack of sales as a result of being shut down while repairs are being conducted.

An extended duration of indemnity coverage extends the covered loss period beyond the time necessary to recover the property. In many circumstances, businesses may not instantly recover after being shut down due to a calamity. Even with complete restoration, many businesses report fewer customers and lower sales after the restoration phase and reopening.

The period following restoration is essential since, without insurance coverage, the entire expense of business operations is borne without commensurate income. As a result, the revenue shortage has a direct impact on profit. However, with an extended duration of indemnity coverage, the insured can be compensated for any shortfalls that occur over this time period.

An prolonged period of indemnity endorsement also allows a policyholder to recover considerable pre-opening expenses incurred during the extended time, restoring income to pre-loss levels. They could include extraordinary advertising and public relations campaigns, as well as the hiring of new employees.

These expenses are typically not covered by conventional business interruption insurance because they are neither normal operational expenses, nor are they considered “expediting” charges because they do not lessen the loss during the usual loss period. These charges, however, lessen the carrier’s obligation when the post-restoration period is covered by an extended indemnity endorsement.

Business interruption insurance is not a standalone policy; it may need to be added as a rider to an existing insurance policy. A rider is an add-on feature that adds coverage to an existing policy at an additional expense to the policyholder. Business interruption insurance can also be included in a comprehensive insurance plan.

• Example of an Extended Period of Indemnity

Consider ABC Corporation, which makes oil drilling equipment to order. A six-month shutdown is ordered after a fire severely damages the factory. When ABC reopens, executives learn that their business is only half of what it was before the catastrophe. In the second month after reopening, the firm is only at 75% of its expected volume. Finally, it takes four months after reopening to restore to pre-loss conditions.

One month before reopening, and for an extended period thereafter, the company incurs significant additional costs advertising that it would be back in operation soon. These advertisements are published in trade periodicals, and representatives are dispatched around the world to reassure customers that the company will be able to fulfill their orders. These additional costs would be covered by an appropriate extended period of indemnity endorsement.