From property to general liability, there are many types of insurance businesses should have. While they all serve a different purpose, one key attribute they have in common is that they protect the insured business from paying the full cost of incurred losses. This is referred to as "indemnity insurance." Most insurance is a form of indemnity insurance, because it serves the purpose of making another party whole for any losses incurred during the policy term.
What is indemnity insurance?
Indemnity insurance is a contractual agreement between the policyholder and the insurance carrier that states that, for the exchange of premium from the policyholder, the insurance company will pay for financial losses that happen in a covered claim.
To indemnify someone is to compensate them for any harm or loss that happens. When it comes to insurance, indemnity can also mean to secure from legal liability for operations or actions. As such, an indemnity insurance policy pays for damages that happen in a covered loss. [Looking for insurance for your business? Check out the best insurance providers for various types of policies.]
Who needs indemnity insurance?
While most insurance policies are considered an indemnity agreement, only certain professions are required to get indemnity insurance, which is often in the form of malpractice or errors and omissions insurance. It usually applies to professional service providers who might make an error that results in loss or harm for the client who needs indemnity insurance.
These are some common professions that are required to get indemnity insurance:
- Doctors
- Accountants
- Lawyers
- Architects
- Contractors
While these professionals must obtain professional liability insurance in order to maintain their license, every business can benefit from indemnity insurance, whether for professional services or other business liability or commercial property needs.
For example, a shoe store experiences a fire in its storage room. It loses $15,000 worth of inventory, and the building it is leasing suffers $50,000 worth of damages. The shoe store owner has a commercial property insurance policy and is indemnified of the losses, meaning the property owner gets the building repaired and the store owner gets reimbursed for his inventory.
How does indemnity insurance work?
With indemnity insurance, there are different ways to pay for the financial losses:
- Repairing or replacing the damaged property
- Paying the value of the damaged property
- Paying for investigation and legal fees for claims
Different types of insurance will indemnify different types of losses. For example, commercial property insurance indemnifies against the losses of leased buildings, inventory, and business property, including materials and supplies. A professional liability insurance policy indemnifies the policyholder from errors in counsel, advice, or workmanship that lead to a third-party loss. General liability insurance indemnifies the policyholder from accidental losses that happen during the course of business operations.
The type of policy you have will determine your coverage as well as the exclusions to the policy. For example, most indemnity policies will not provide protection for illegal actions or intentional damage.
When a loss arises, the policyholder contacts the insurance carrier to open a claim. From there, the carrier assigns a claims representative to fully assess damages and coordinate the payments based on the contract terms. If a third party is involved, the payment will be made directly to that party rather than the policyholder.
Is an indemnity policy transferable?
Commercial indemnity insurance is not transferable. As the policyholder, you pay the premiums to gain the protection. The protection covers more than just your own losses, so in that sense, the indemnity itself is transferable. With the policy, you transfer indemnity to third parties in the event that they experience a loss resulting from your business.
The third party doesn't own the insurance policy and doesn't need to. Their losses are protected by your contractual agreement with the insurance carrier.
There are times when you, as a business owner, will want to transfer the risk to another party. For example, if you hire a contractor, you may want them to indemnify you from their business risk while working for you. In this case, you would require them to have insurance and name you as an additional insured to protect you while they perform work on your behalf. In this case, the risk is transferred, not the policy.
What does an indemnity policy cover?
An indemnity policy can cover many types of losses, depending on the type of policy it is. As long as the policy covers the losses, the insurance carrier will pay them.
Examples of what an indemnity policy will cover
| Slip-and-fall accidents | Covered by a general liability insurance policy, slip-and-fall accidents pay the injured party's medical expenses and potential lost income. |
| Medical mishaps | A medical malpractice insurance policy will pay for damages a patient incurs when a doctor makes a mistake. |
| Property theft | Commercial property insurance will pay for the loss of any property stolen from the business, such as computers or inventory (minus the deductible). |
Are all types of insurance based on indemnity?
While most insurance is based on the principle of indemnity, not every policy is an indemnity insurance policy. Life insurance is the most common example of a policy that is not an indemnity policy. The reason is that the loss is not definable, thus the payment is a set amount based on ideas of loss that may or may not be accurate.
How to choose an indemnity policy
It's important to make sure you have the right insurance. Consider the types of risks your business has and whether you are required to carry certain types of policies. Remember that certain professionals are required to carry professional liability insurance to maintain their licenses. You may also be required to obtain commercial property or general liability insurance for a commercial lease contract.
If you aren't required to carry insurance, you'll want to consider risk. If your establishment gets a lot of foot traffic, you may be at risk for slip-and-fall accidents or other third-party claims. The average slip-and-fall accident claim is valued at $20,000 – and you'll need to have the financial resources to pay that if you don't have an indemnity policy. Generally speaking, if you can't afford to pay for a claim, you should get an insurance policy.
How much does indemnity insurance cost?
The cost of indemnity insurance will depend on the type of policy you get and your business's industry, revenue, location, and other factors. A general liability insurance policy could cost as little as $500 per year. Professional liability insurance could be more expensive, depending on your profession. On average, companies spend $500 to $1,000 a year per employee for errors and omissions insurance. Property insurance depends on the value of the property being insured.
It's best to discuss your insurance needs with your agent to make sure you are getting the right coverage for your biggest risks. Compare quotes to save on insurance and get the best possible price.