Indemnity InsuranceWhat is it and Who needs it
Consider this scenario; a homeowner hires a professional decorator to remodel an old home. Three years after the project, the homeowner sues the decorator over the poor choice of paint. Here’s another one; four years after selling a home, the property seller is slapped with a lawsuit by the home buyer due to a lack of an installation certificate for the furnace.
These two scenarios sound like they might not happen but they are just a sample of the litany of lawsuits in the justice system. The United States ranks as one of the most litigious societies in the world. At a glance, this might not look like a big deal until you consider the impact this has on businesses and professionals.
Whether you are a lawyer, doctor, business owner or homeowner, you might soon find yourself in court over claims touching on your services. This is where indemnity insurance comes into play. This is a type of cover by insurance companies that guarantees compensation for actual or potential losses or damages sustained by another party.
Whatever your profession or type of business, it’s imperative to understand how this insurance policy works. It might come handy in the future in case one of your clients or customers slaps you with a lawsuit.
What is Indemnity?
Many legal contracts have an indemnity clause. Many people sign these contracts without considering the implications. Before you put pen to paper, you need to ask “what is indemnity?” This might save you a lot of trouble in the future.
In the simplest indemnity definition, indemnity refers to a contractual obligation of one party, in this case, the insurance company, (the indemnifier) to pay for losses or damages incurred to the other party (the indemnity holder).
In other words, indemnity insecurity or protection accorded by the indemnifier against financial liability. In return, the indemnity holder pays premiums to the indemnifier (the insurer).
Indemnity is the basis of most insurance contracts. The indemnifier (insurer) indemnifies the policyholder. This means they guarantee to cover them against any losses or damages. Such losses or damages could arise due to claims or suits brought against the indemnitee by a third party.
Examples of Indemnity
- If you are selling a home, you can get indemnity by buying a policy that covers a legal defect with their home.
- A swimming pool facility includes an indemnity clause in their registration agreement. If a swimmer suffers an injury when at the facility, the business owner is covered against financial liability or loss.
- A fitness trainer includes an indemnity clause in the gym membership contract to cover against any lawsuits by the trainees.
What is Indemnity Insurance?
Indemnity insurance is a type of cover where the insurer guarantees compensation for actual or potential losses or damages sustained by the policyholder. This is a type of a comprehensive form of insurance compensation for damages or loss. In most cases, it also includes an exemption from liability for damages to a third party.
This is a common type of insurance for professionals and business owners. They use this for protection against financial losses if found to be at fault for specific events in the course of their work or business operations.
How Indemnity Insurance Works
A quick search using the phrase “what is indemnity insurance?” gives millions of results. This highlights the importance of this form of cover today. With indemnity insurance, businesses or professionals gets protection from indemnity claims. These claims are common mostly due to poor services or malpractices in the medical professional.
- Why claims might arise
This type of insurance cover offers the policyholder with a defined amount of financial protection when faced with claims. Such claims can arise from different reasons, including misjudgments, errors, and breach of contract, infringement of intellectual property rights, breach of confidence, or overall negligence. Whatever the cause of the claims, you have protection against financial losses.
- What’s covered, and to what extent?
Every indemnity insurance contract is unique and comes with its own structure in terms of what is covered, and to what extent. It is important to check these details in the specific agreement you sign. The insurance company (indemnifier) covers the cost of the legal defense against a claim and any payout at the end of the lawsuit.
Most of these contractual agreements also include a letter of indemnity. It is a guarantee that both parties in the pact will meet the contract stipulations or else an indemnity must be paid.
- Period of indemnity
There’s also a period of indemnity which defines the specific length of time for which the indemnifier is under obligation to pay. This period doesn’t only cover the period when you are paying premiums. In some cases, it can also apply after the last premium, depending on the terms of the agreement. It might also include a retroactive clause for claims arising from issues before the start of the coverage.
The contract also includes the rate at which the indemnity is paid and the person to whom payments will be made.
The terms of the indemnity agreement will determine how it will be paid. In most cases, the indemnity is in cash but in other cases, it might be in terms of repairs or replacement of items.
For instance, if a doctor faces a lawsuit due to medical negligence, they can get reimbursement for all the legal costs and any compensation paid. In the case of a dog hoarding business which has indemnity insurance, there’s protection against financial losses in case a dog dies at the facility.
What’s Indemnity Cover?
Indemnity insurance covers:
- Legal costs and expenses associated with a claim
- Compensation due to loss, damage, and/or injury
- Loss of expected profit
- Breach of contract
- Damages or compensation costs in case of professional indemnity insurance cover
- Protection against certain liability in negligence
What’s Indemnity Benefit?
Indemnity benefit insurance is a type of coverage that pays when a covered loss occurs. This contract mostly applies to indemnity hospital insurance among other types of benefits and covers a range of costs or losses. Insurance plans that pay after a specific event fall under indemnity benefits. They include workplace injury or tooth extraction.
Every contract has its list of benefits; for instance, dental insurance will include a list of dental procedures that qualify for indemnification.
The flexible nature of an indemnity benefit contract is one of the obvious advantages. You can structure this plan to cover any expected loss and it has clear terms of payment under different situations.
On the flip side, there’s a complex process of determining whether a type of loss falls under the plan. Indemnity benefits also don’t cover the losses incurred.
What Are Indemnity Insurance Costs?
This insurance cover is not costly and most insurance providers offer it. Indemnity insurance costs will range from $20 per month to several hundred dollars a month. The costs will vary depending on specific industries.
For instance, indemnity insurance cover for a medical doctor might be higher for say an interior decorator. You can also buy any liability amount you want based on how much coverage your business or practice needs.
Who Needs Professional Indemnity Insurance?
Any business providing professional services, consultancy or advice needs indemnity cover. Businesses offering financial services such as accounting, estate planning are required to buy this cover by their professional organizations and it’s for their own good.
In some cases, clients will require professional indemnity insurance to work with you. This cover is also crucial if you handle people’s information. When providing expert services, it is not unusual to make mistakes which might lead to lawsuits. With indemnity insurance, you’re well covered.
Some of the professional services providers who need this type of insurance include:
- Graphic designers
- Chartered accountants
- Fitness trainers
- It consultants
- Medical practitioners
- Risk management experts
- Town planning professionals
- Business consultants
- Investment firms
- Management companies
Are Indemnity Clauses Enforceable?
The enforce ability of indemnity agreements is a major battle when litigation arises. Overall, indemnification provisions are enforceable but there’s a problem with some type of clauses.
Broad form/ ‘no-fault’ indemnities which require a party to indemnify another party for any claim irrespective of fault sometimes violate public policy. This makes it hard to enforce.
In some states, indemnification provisions providing for punitive damages are prohibited. To avoid such problems, make sure the indemnity clause is clear and conforms to all applicable laws. The clauses should be reasonable and equitable in all respects.
Can Indemnity Be Assigned\Revoked?
An indemnity is a contractual agreement and to assign or revoke it involves new negotiations between the parties. All parties highly respect indemnities clauses, but this doesn’t mean they are rigid. If any party wants to assign the identity to another party or revoke the contract, it is advisable to have legal representation during such negotiations.
From the basic indemnity meaning to the more complicated details of how these contracts work, you now have enough insight to make an informed choice. Whether you want to buy indemnity insurance cover for your business or you want to protect your practice against financial loss, indemnity insurance is a crucial asset.