Indemnity refers to the practice of making a payment to another party because that party has suffered some form of loss or damage. The exact reason behind the need for the payment may vary from situation to situation, as might the extent of the payment and the exact party making the payment with relation to the payee.
For example, if two individuals get into a car accident, then one might pay an indemnity to another because that one party might be the party that is held responsible for the accident. On the other hand, however, the car insurance company for the responsible party might ultimately be held responsible for paying the indemnity, which means that the car insurance company would pay the indemnity to the injured party even though the injured party was not injured by the car insurance company
Indemnity is normally only paid to the extent of returning the injured party to the state he or she was in prior to injury.
An indemnity clause is a specific clause which is often included within contracts in order to provide the terms for any payments of indemnity which might arise with relation to that contract. For example, an indemnity clause might set out that one party is responsible for paying compensation to another if the company which they jointly form loses money. An indemnity clause will likely determine exactly how much compensation must be paid in any given instance, along with who must pay whom.