What is the purpose of indemnity in a contract?

Indemnity in a contract serves the essential purpose of ensuring that a party is restored to their original position—or "made whole"—after experiencing a loss due to the actions or obligations of another party. This concept is fundamental in various types of agreements, particularly in insurance, surety, and contractual relationships, where one party may need to compensate another for losses incurred.

The principle of indemnity aims to protect against financial loss by allowing the indemnified party to recoup their losses through the indemnitor, who assumes responsibility for the damages. This restoration can include reimbursement for expenses, payments for damages, or any other means necessary to address the impact of that loss. Thus, indemnity functions as a risk management tool, providing security and assurance that one party will not suffer financial detriment due to the performance or failure of the other party.

While other options may each play a role in contractual agreements, they do not capture the primary essence of what indemnity aims to achieve. For example, creating a binding agreement is a broader function of contracts rather than specifically an indemnity clause, and limiting liability or providing profit to another party do not directly align with the restorative intent of indemnity.