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What is 'Indemnity Insurance'

Indemnity insurance is an insurance policy designed to protect professionals and business owners when they are found to be at fault for a specific event such as misjudgment. Typical examples of indemnity insurance include professional insurance policies such as malpractice insurance and errors and omissions insurance, which indemnify professionals against claims made in the conduct of their business.

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BREAKING DOWN 'Indemnity Insurance'

Indemnity insurance, also referred to as professional liability insurance, is a supplemental form of liability coverage specific to certain professionals or service providers who offer advice, expertise or services. Unlike general liability or other forms of commercial liability coverage that protect businesses against claims of bodily harm or property damage, indemnity insurance provides protection against claims arising from possible negligence or failure to perform that result in a client’s financial loss or legal entanglement. A client who suffers a loss can file a civil claim, and the professional’s indemnity insurance pays the cost of defending against the claim as well as any damages awarded by the court.

Indemnity Insurance in Practice

Generally, indemnity insurance must be carried by certain professionals involved in financial and legal services, such as financial advisors, insurance agents, accountants, mortgage brokers and attorneys. In dispensing financial and legal advice, these professionals can be liable for negligence or inadequate performance, which is more often than not inadvertent but damaging to a client. In the financial industry, anyone who provides financial advice that leads to the purchase of an insurance or investment product must obtain errors and omissions insurance. Accountants can be found negligent for advising a client on tax matters that result in a penalty or additional taxes.

In the medical field, malpractice insurance is a form of compulsory professional indemnity insurance that protects practitioners from civil claims arising from negligence resulting in physical or mental harm to their patients. A growing number of executives are purchasing indemnity insurance to protect their deferred compensation accounts against company claims or bankruptcy. Other professions and occupations, such as contractors, consultants and maintenance professionals carry indemnity insurance as a practical matter because of their exposure to “failure to perform” claims.

Professional indemnity insurance provides a critical layer of protection for service providers who might also need other forms of liability coverage such as general liability insurance or product liability coverage. Because of the possibility that a claim could be filed after an indemnity insurance policy is terminated for an act that occurred while it was in force, the insured can add an endorsement that extends the coverage to any occurrence.

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