Indemnification is an agreement by one person to pay for the losses another person suffers. The theory is to restore the victim of a loss, in whole or in part by payment. repair. or replacement. The best example of this legal theory is an insurance contract. If you have an insurance policy, then the insurance company agrees to pay you for the losses you have incurred that fall under that policy. An auto insurance company will pay the policy holder for losses that arise out of a car accident. Another area where indemnification agreements occur is in business arrangements and is often found in the pre-closing and post-closing activities surrounding the purchase of businesses. The duty to indemnify also shows up in many other contractual relationships, including license agreements, franchise agreements and leases.