What is Indemnity Insurance?
Indemnity Insurance (also known as professional liability insurance, or errors and omissions insurance) protects businesses and individuals from certain legal actions taken against them, or other possible losses and damages.
There are many different forms of indemnity insurance across different industries. Individual policies will dictate what specific events are covered.
Some common examples of indemnity insurance include:
- A malpractice insurance policy held by a hospital. If a doctor employed by the policy-holder is successfully sued for malpractice, the hospital’s malpractice insurance may cover some or all of the damages.
- An errors and omissions insurance policy held by a financial advisor. If legal action is taken against the financial advisor for the misappropriation of funds, and the nature of the lawsuit is specifically covered by the policy, then the policy will cover some or all of the damages.
What is Indemnity Insurance?
- A deferred compensation insurance policy held by a high-level executive. If the executive has been awarded future compensations by the company, and the company goes bankrupt or is otherwise unable to meet its obligations, the policy will award some or all of the funds to the executive.
- An indemnity insurance policy held by a digital media company. If the company unintentionally commits copyright infringements, and is successfully sued for doing so, the policy will cover some or all of the damages awarded.
- An indemnity insurance policy held by a sports equipment manufacturer. If the company manufactures a ball that is found to be defective, and the company loses business as a result of having to redesign and re-manufacture the ball, a policy taken out for this purpose will compensate the manufacturer.
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What is the Difference Between Indemnity Insurance and General Liability Insurance?
General liability insurance protects businesses from direct and often accidental events, such as bodily harm suffered from slipping on a wet floor.
By contrast, indemnity insurance specifically protects businesses and service providers from faults or errors in their products or services.
If a company manufactured a defective product that caused bodily harm to a group of customers, and those customers won a class-action lawsuit against the company, general liability insurance would not help the company pay for damages awarded.
Professional indemnity insurance, however, would pay the damages awarded so long as the type of lawsuit was specifically covered by the policy.
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How Does a Typical Indemnity Insurance Policy Work?
Most indemnity insurance policies operate on the bases of claims made. In other words, the policy only applies to legal claims initiated during the term of the policy. Some policies offer limited forms of retroactive coverage, but many do not.
Indemnity insurance policies are designed to be specific. As such, a given policy will be stringent in defining what types of losses and damages are covered. An accounting firm taking out an errors and omissions policy will want to be sure that the scenarios against which they want to protect themselves are clearly named in the policy.
Many types of indemnity insurance contain “extended reporting” clauses that cover claims that arise within the policy period, but are reported after the policy has terminated. Extending reporting is typically in effect for six to twelve months following the termination of a policy, and policyholders who use it are usually subject to fees.
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Does My Business Need Indemnity Insurance?
Most businesses who offer a professional service—such as medical practitioners, financial service providers, business consultants, accounting firms, and construction companies—carry some form of professional indemnity insurance to protect them in case of legal actions resulting from faults or errors on their part. Without it, the business or service provider will be 100% responsible for legal or operational damages arising from professional faults.
Professional indemnity insurance is especially important wherever legal actions are possible as a result of business or service provider’s activities. Since the damages sought in such legal actions can easily be in the millions of dollars, lack of indemnity insurance can pose serious risks to the long-term survival of a business.
Aside from the practical advantages of indemnity insurance, many types of businesses are required by law to carry some form of professional indemnity insurance.
What Are Some Items that Indemnity Insurance Does Not Typically Cover?
• Defamation
• Breaches of contract
• Cost of contract
• Breaches of warranty
• Intellectual property disputes
• Data breaches and cyber-hacking scenarios
Indemnity insurance policies generally contain a significant number of exclusions in order to be legally differentiated from other forms of insurance, such as general liability. Indemnity insurance does not cover criminal prosecution.
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