Indemnity Insurance

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.

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.

Indemnity Insurance

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Key Takeaways

How Does Indemnity Insurance Work?

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, indemnity insurance is the 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.

Real-World Cases

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.

Let us take another example. A property owner decides to sell their house, which might create legal trouble and cost much in the future. If the owner takes this insurance, it will cover the costs on the owner’s behalf due to a lapse in the future. 

Indemnity Insurance Features

  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, accountingAccountingAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial more, 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 of Indemnity Insurance

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 the 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 the 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.


Many professions benefit from indemnity insurance, including medical, finance, legal, and construction sectors.

Indemnity Insurance in Medical

Having malpractice insuranceMalpractice InsuranceMalpractice insurance is a type of insurance that medical professionals and experts buy to protect themselves from professional liability. This provides protection to doctors, medical professionals, and experts from patients who file medical negligence more 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.

Indemnity Insurance for Building

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 insolvencyInsolvencyInsolvency is when the company fails to fulfill its financial obligations like debt repayment or inability to pay off the current liabilities. Such financial distress usually occurs when the entity runs into a loss or cannot generate sufficient cash more.

Indemnity Insurance for Business

Service providers like financial advisors, chartered accountants, architects, engineers, mortgage brokersMortgage BrokersA mortgage broker is an intermediary that liaisons between the mortgage borrower and mortgage lender. Such brokers are responsible for gathering information, documentation process concerning income earned, an asset owned, credit report, and employment details to assess the borrower's ability to secure more, 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.

This has been a guide to what is indemnity insurance and its meaning. Here we discuss how does it work along with the examples. You may also have a look at the following articles to learn more –