Why Your Business Needs Indemnity Insurance

What is indemnity insurance?

Indemnity insurance is a contractual agreement between the policyholder and the insurance carrier that states that in exchange for a 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. 

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 (E&O) insurance. Usually, it 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 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 cover 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 kinds 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 protect against illegal actions or intentional damage.

When a loss arises, the policyholder contacts their insurance carrier to open a claim. From there, the carrier assigns a claims representative to assess damages fully 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.

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

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’re required to carry certain types of policies. Remember that certain professionals must 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 the risks unique to your company. 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 potential claim, you should get an insurance policy.

To choose an indemnity policy for your business, follow these tips:

• Be clear on what exactly you need coverage for: Before searching for a policy, try to identify the specific risks that are associated with your line of business or type of profession. Research the level of liability you might be exposed to if the worst happens. By knowing what the most significant risks are and how much a mistake might cost, you’ll be able to identify the most suitable policy.
• Compare policy limits: When getting quotes from insurers, look at the maximum coverage they’re offering against potential claims on each policy. If you choose a policy where a potential payout isn’t high enough, it may leave you financially vulnerable.
• Read the terms carefully: Understand what insurers won’t cover you against and the conditions under which they’ll provide you with protection. Pay close attention to the deductibles — that’s how much you have to pay out of pocket before your insurer starts to pay the rest.
• Check potential insurers’ reputations: Some insurers pay out a lot quicker than others. You can get a good idea of a particular insurer’s pay-out policies by seeking out reviews from customers online. Try to choose an insurance provider that doesn’t put too many obstacles in your way.
• If in doubt, speak to a broker: Insurance, like mortgages, are complex legal agreements that are hard for most laypeople to understand. You may wish to work with an insurance broker to help you find the right policy or get an attorney to check out an insurer’s contractual terms before you commit.

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. Meanwhile, on average, companies spend $500 to $1,000 a year per employee for E&O 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’re getting the right coverage for your biggest risks. Compare quotes from multiple providers and ask about discounts to save on insurance and get the best possible price.

Pros and cons of indemnity insurance

As with all types of insurance, there are upsides and downsides to indemnity coverage. Here are the four main advantages and disadvantages.

Indemnity insurance advantages

• Meaningful protection: Doctors, lawyers, architects, marketing teams, information technology consultants — if they get something wrong, they’re exposed to extreme liability risks that could put them out of business. Indemnity insurance means you’re covered financially against any professional errors, omissions and negligence.
• Financial certainty: Knowing you have insurance protection in place, you don’t need to charge customers sky-high prices to ensure that, if there is a claim, you have the free cash available to cope with it. This protects you and your clients.
• More credibility: Having an indemnity insurance policy assures clients and partners they will be fully compensated if they are subject to any potential mistakes or accidents and their complaint is justified. Some larger businesses and public sector agencies will not buy from companies or freelancers with no indemnity insurance.
• Legal costs covered: Compensation costs can be significant, as can the legal costs associated with a case, even if the court rules in your favor. These costs are covered by your insurance policy.

Indemnity insurance disadvantages

• Premium costs: Depending on your business or profession and the size of invoices you deal with, the premium payments on an indemnity insurance policy can be significant.
• Complex policies: Without professional guidance from an insurance broker or legal expert, you may find it hard to understand the terms, conditions and, most importantly, the exclusions in your indemnity insurance policy. Business owners need to be certain they fully understand the policy they’re offered before committing to it.
• Coverage limits: Most indemnity insurance policies have generous coverage limits but, depending on what you do and the size of the deals you strike, a policy may not cover you against extremely high claims. This could leave you exposed and responsible for paying the remainder of a large judgment against you. You may wish to speak with a broker about taking out an additional excess liability policy.
• Complacency: Although unlikely, the existence of an indemnity policy may lead to complacency in how a business manages risks. This is because they believe their insurance will cover them, no matter the circumstances of a case. Even with an indemnity policy, you should always practice other risk management strategies.

Kimberlee Leonard contributed to this article.