Indemnity Insurance Explained

Indemnity insurance compensates an insured person or business for certain unexpected losses or damages—typically covering legal defense costs, court fees, and settlements when the insured is alleged to have performed negligently or failed to meet professional standards. It’s commonly used by professionals and service providers whose advice or actions can cause financial harm to clients.

Key takeaways

• Indemnity insurance (also called professional liability insurance) protects professionals and businesses against claims of negligence, errors, or inadequate performance.
• It covers litigation costs, fees, and settlements up to policy limits.
• Typical forms include medical malpractice and errors & omissions (E&O) insurance.
• It differs from general liability (which covers bodily injury and property damage) and from life insurance (which pays a death benefit).

How indemnity insurance works

• The insured pays premiums to the insurer in exchange for coverage.
• If a client files a claim alleging negligence or poor performance, the insurer typically handles defense costs and pays settlements or judgments for covered claims, up to the policy limit.
• Coverage terms, limits, and exclusions are specified in the policy; premiums depend on factors such as profession, claims history, and coverage limits.

Who needs indemnity insurance

Indemnity insurance is recommended—or required in some fields—for professionals whose advice or services can create financial or physical harm, including:
* Medical professionals (malpractice insurance)
* Lawyers and accountants
* Financial advisors, insurance agents, and mortgage brokers
* Consultants, contractors, and technical service providers
Executives sometimes buy indemnity coverage to protect deferred compensation arrangements or against company claims, and many businesses carry it alongside other liability policies.

Common types and examples

• Professional indemnity (professional liability / E&O): Protects against claims arising from professional services or advice that caused financial loss.
• Medical malpractice: Protects medical practitioners against claims of negligence that result in patient harm.
• Hospital indemnity: A supplemental plan that pays fixed benefits for hospital stays or admissions not covered by primary insurance.
• Fixed indemnity plans: Health plans that pay a predetermined benefit per healthcare event or day of hospitalization rather than reimbursing actual costs.

Comparing indemnity insurance and life insurance

• Indemnity insurance reimburses or defends the insured for covered claims up to the loss amount or policy limit.
• Life insurance pays a predetermined lump-sum death benefit to named beneficiaries when the insured dies; it is not a reimbursement of a specific claim or loss.

Key factors when choosing a policy

• Coverage scope: What types of acts, services, or professionals are covered and what exclusions apply.
• Policy limits and deductibles: Maximum payout and out-of-pocket costs.
• Claims-made vs. occurrence policies: Whether coverage applies based on when the claim is made or when the incident occurred (confirm retroactive coverage if needed).
• Premium drivers: Profession, claims history, industry risk, and requested limits affect cost.
• Endorsements and extensions: Optional add-ons that broaden or clarify coverage.
• Regulatory or contractual requirements: Some professions or contracts may mandate specific coverage.

Conclusion

Indemnity insurance is a vital protection for professionals and businesses that face potential claims of negligence, errors, or inadequate performance. It helps manage legal and financial risks by covering defense costs and settlements. When buying a policy, carefully compare coverages, limits, exclusions, and costs to ensure it matches the specific risks of your profession or business.