An indemnity is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnifying party (A) may or may not be responsible for the loss suffered by the indemnified party (B). Forms of indemnity include cash payments, repairs, replacement, and reinstatement.
As a legal concept, it has a more specific meaning, namely, to compensate another party to a contract for any loss that such other party may suffer during the performance of the contract. For instance, compensation connotes merely a sum paid to make good the loss of another without regard to the payer's identity, or their reasons for doing so. As the following paragraphs should explain, an indemnity is a sub-species of compensation, in the same way that compensation and reparation are.
The obligation to indemnify differs from the obligation to pay Compensation, or make reparation, in that an obligation to indemnify is a voluntary obligation. If C crashes into B's car and damages it and the crash is due to C's negligence, most legal systems will impose liability upon C to pay B for the damage caused. C's obligation to B arises by force of law irrespective of whether C subjectively wishes to compensate B or not. This is not, therefore, a situation of indemnity; the relationship between B and C is involuntary. In legal terms, it is a case of tortious (common law) or delictual (civil law) liability.
But, if A had a contract with B under which A agreed to pay for any damage to B's car, then A paying B would be obligatory (even if A subjectively regretted the contract at this point). In legal terms, A's liability is contractual and the sum paid is an indemnity. The contract just described between A and B is of course one of automobile liability insurance.
It was stated in the first paragraph that the indemnifying party (A) may also be the party responsible for the loss. This is because although A will probably have a legal duty to compensate B (depending on the rules for damage wrongfully caused in the relevant legal system), A may also have a contractual duty to compensate B. Such indemnity clauses can be found in many contracts aside from those specifically for insurance. For instance, (staying with the automobile theme), a car rental contract may stipulate that the renter will be responsible for damage to the rental car caused by their reckless driving. In other words the renter will indemnify the rental company.
An obligation to indemnity can also be distinguished from a guarantee granted by one party in regard to the potential debts of another. For example A might agree to stand guarantor (or surety) for her son C (an impecunious law student) so that if C cannot afford to pay his rent to B (his canny landlord), A will be obliged to pay for him. Here, C is the one primarily responsible for payment of the rent. A's liability is only ancillary. The liability of an indemnifier, properly so-called, is primary. This distinction between indemnity and guarantee was discussed as early as the eighteenth century in Birkmya v Darnell. In that case, concerned with a guarantee of payment for goods, rather than payment of rent, the presiding judge explained that a guarantee effectively says "Let him have the goods; if he does not pay you, I will." By contrast, an indemnity is like saying "Let him have the goods, I will be your paymaster.
The distinction between indemnity and damages is subtle, but these two may be differentiated by considering the roots of the law of obligations. How can money be paid where the defendant is not at fault? The contract before rescission is voidable but not void meaning that for a period of time there is a legal contract. During this time both parties have legal obligation. If the contract is to be voided ab initio the obligations performed must also be compensated. Therefore the costs of indemnity arise from the (transient and performed) obligations of the claimant rather than a Breach of obligation by the defendant.
When the slaves of Zanzibar were freed in 1897, it was by compensation since the prevailing opinion was that the slave owners suffered the loss of an asset whenever a slave was freed.
In the 1860s in the United States, U.S. President Abraham Lincoln had requested many millions of dollars from Congress with which to pay slave owners "for the loss of their property." On July 9th, 1868, part IV of the Fourteenth Constitutional Amendment dismissed all of the claims that slave owners had been injured by the freeing of the slaves.