Indemnity Insurance

Updated on April 3, 2024
Article byAndrea Calcagno
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Indemnity Insurance Meaning

Indemnity insurance refers to the insurance coverage that safeguards an insured against the monetary losses arising out of professional negligence. Like any other insurance, this also provides coverage in exchange for regular premium payments from the insured. Professional indemnity insurance is curated to protect professionals against specific instances such as misjudgment. These insurances help companies deal with legal expenses and settlement costs.

Indemnity Insurance

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For instance, a client could sue a wealth management firm, alleging a financial loss after following its advice. If the firm has taken an indemnity insurance policy, it may cover monetary damages, including legal expenses incurred from the lawsuit. However, the term indemnity has many connotations, making it different from other policies. Let us explore its intricacies in detail.

Key Takeaways

  • Indemnity insurance is a type of insurance policy that provides financial protection against losses or liabilities that may arise from legal claims, disputes, or damages.
  • Indemnity insurance is commonly used in professional industries where errors, omissions, negligence, or malpractice can lead to financial harm for clients or third parties.
  • The coverage provided by indemnity insurance typically includes legal defense costs, settlements, judgments, and other related expenses associated with a covered claim.
  • Indemnity insurance helps businesses and professionals mitigate financial risks, maintain their reputation, and fulfill contractual obligations while providing peace of mind to clients or customers.

Indemnity Insurance Explained

Indemnity insurance is a protection plan for professionals against specific instances such as misappropriation or misjudgment. Similar to any other insurance process, premium payments are made in return for protection against negligence or any other such professional decisions resulting in losses for the company.

Whether it is a business or a profession, there is always a risk of financial loss. Indemnity insurance holds an important place and meaning in the lives of professionals such as health workers, lawyers, and financial advisors. The insurance is designed to lessen the liability arising out of one’s profession. Before getting into its details, let us understand how the term indemnity can have different meanings.

The first interpretation derives from the idea that indemnity or indemnification would suggest compensating someone for their loss. The insurance will cover only the cost of damage, not going beyond it. In legal terms, indemnity is a contractual clause that protects one party from being liable to pay for the losses sustained by a third party.

In insurance, incurring indemnity insurance cost gives financial protection given to a business or professional from the financial losses incurred due to professional negligence, errors & omissions, or malpractice. If their client files a lawsuit against them for suffering a financial loss from their underperformance, the insurance saves the professional. In other words, it helps in transferring the liability to another party. 

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Features

Covering all bases in relation to professional negligence is vital as companies would want to protect themselves from losses irrespective of how they arise. Let us understand the features of a professional indemnity insurance through the discussion below.

  1. It covers civil cases involving damage or compensation claims made against a service provider by its client.
  2. Its scope of coverage includes compensation, settlements or damages, legal expenses, and run-off cover.
  3. The service providers active in the medicine, health, finance, accounting, legal, and construction industry are eligible for indemnity insurance.
  4. The insurance covers the legal expenses (court and lawyer fees) and settlements incurred by the business while defending the claimant’s indemnity lawsuit.
  5. The insurance policy remains effective until it expires and requires the insured to pay the insurance company the premiums regularly to avail the benefits.
  6. Sometimes, the insurance includes a policy with an endorsement, extending coverage beyond the policy expiration date to certain acts occurring during the policy tenure.
  7. Even though cases considered under the indemnity insurance definition are low risk, they can prove costly upon occurring. 

Types

Let us understand the major types of indemnity insurance costs incurred by companies to safeguard themselves from losses through the explanation below.

The two most common types of indemnity insurance include malpractice insurance and errors & omissions insurance.

The first policy is popular in the medical field, where the risks of negligence and errors are always higher. And the second coverage suits professional service providers wherein even a piece of wrong advice or documentation error may drag them to court.

Though they are not compulsory, businesses of all sizes wish to have a parachute of some kind to prevent a small business mistake from ruining their businesses.

While this insurance seems too good to be true, it has limitations. For example, it limits coverage based on certain factors considered during the formulation of the insurance policy. It means any amount exceeding the covered limit has to be paid by the business or professional itself.

Examples

Let us understand the concept of professional indemnity insurance with the help of a few examples. These examples will help us understand the intricacies of the concept and its related factors in-depth.

Example #1

Having malpractice insurance is compulsory in the field of medicine. Medical professionals see a large number of civil claims for medical negligence harming patients physically or mentally. A medical indemnity insurance policy usually covers damages from incorrect medicine dosage or wrong prescription and surgical errors. It also protects the medical institution or practitioner from slander and other accusations that might sabotage its reputation.

Example #2

The solicitor or contractor recommends homeowners get this insurance before buying or selling a building of any kind. It is a fundamental step for any homeowner because it may solve problems they never imagined. For example, missing legal papers related to the property or a non-working boiler may make the tenant file a claim against the owner. In such a situation, this insurance will help cover all legal fees and expenses to fight the indemnity claim related to fixing the problem itself. Other coverage areas might include the absence of easement and insolvency.

Example #3

Service providers like financial advisors, chartered accountants, architects, engineers, mortgage brokers, and legal professionals must hold this insurance. These professions have many things in common, including professional negligence, error in judgment, bad advice, or unfortunate circumstances, resulting in the loss of money or property on the client’s end. As such, they can be held liable in court for those monetary losses, and this insurance protects against that.

Example #4

The insurance cover could also protect against the potential risks of a medical process. For example, in the aftermath of COVID-19, many vaccine makers seek indemnity insurance to cover the potential losses that could occur to the vaccine takers post the jab. Vaccines typically take years to develop, but many vaccine manufacturers have hurried through the process due to the pandemic’s seriousness. It has left enough scope for potential losses from the side effects of the jab. An indemnity coverage will protect the vaccine-makers when someone sues them for a loss. The WHO co-led COVID-19 compensation scheme allows developing countries using the COVAX vaccine to indemnify pharmaceutical companies until July 2022.

Frequently Asked Questions (FAQs)

Who needs indemnity insurance?

Indemnity insurance is typically recommended for professionals such as doctors, lawyers, architects, engineers, accountants, consultants, and other individuals or businesses providing professional services. It is also valuable for contractors, manufacturers, and service providers whose work may result in financial losses or liabilities for clients.

What does indemnity insurance cover?

Indemnity insurance covers losses or liabilities arising from professional negligence, errors, omissions, breach of professional duty, or other covered events. It protects legal defense costs, settlement payments, judgments, and related expenses associated with covered claims.

How much coverage should one have with indemnity insurance?

The amount of coverage needed depends on various factors, including the profession’s nature, the business’s size, the potential financial impact of a claim, contractual requirements, and regulatory considerations. Therefore, assessing the risks and consulting with insurance professionals to determine an appropriate coverage limit is advisable.

This has been a guide to what Indemnity Insurance is and it’s meaning. Here we discuss how it works along with its features, types, and examples. You may also have a look at the following articles to learn more –