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Indemnity is a legal and insurance term that can be important to understand. Learn the meaning.

What is indemnity?

No matter how many years you or your firm has spent building expertise in your industry, there is always the risk that you or one of your colleagues could make a mistake. If a client alleges that you provided inadequate services, advice or designs, indemnity involves payment of legal costs and any expenses your client may incur when making the claim. It also covers any compensation you may have to pay to your client.

Deeper definition

Indemnity refers to compensation paid for damages or loss, similar to an insurance policy or contract. From a legal standpoint, indemnity can also refer to a company’s or professional’s exemption from the liability that results when they cause damages to another party. Indemnity can be based on a contract between two parties, wherein one of the parties agrees to cover any losses or damage that the other party creates.

Indemnity is also an insurance policy contract in which the insurer (known as the indemnitor) agrees to pay compensation to the insured (the indemnitee) for losses or damage in return for payment of regular premiums that the insured pays to the insurer.

Indemnity insurance is a way for companies and individuals to protect themselves from clients’ claims of malpractice or provision of inadequate services. Unlike typical liability insurance that protects against property damage, indemnity insurance protects against negligence arising from services. By having this insurance, the holder (indemnitee) avoids having to pay the full amount of an indemnity, even if he or she is at fault. Because lawsuits are common, many companies have indemnity insurance to mitigate risk. Professional indemnity insurance can protect individuals and companies against claims arising from:

  • Lost data or documents
  • Professional negligence
  • Libel
  • Defamation
  • Unintentional breaches of confidentiality or non-disclosure agreements

Similar to other kinds of insurance, professional indemnity insurance takes care of the costs of a claim, including fees, court costs and settlements. How much the insurance covers is dependent on the specific clauses of the agreement.

Considering various industry bodies’ regulatory requirements, there are many businesses that might take out professional indemnity insurance: engineering, surveying, accounting and medicine, for example. Professionals who are engaged on a contract basis, like business consultants, IT contractors and management consultants, may need indemnity insurance in order to obtain contracts.

While you might not be obligated to obtain professional indemnity insurance, it can help you avoid paying thousands of dollars in legal fees and compensation to defend a claim. Without professional indemnity, you may be left unprotected if you have a claim brought against you for a service that you provided.

Indemnity example

One common example of indemnity insurance is malpractice insurance, which is a form of coverage for medical professionals, and errors and omissions insurance, which covers companies and employees in finance-related fields such as investment advising and financial planning. There are also companies that opt for deferred-compensation indemnity insurance to protect against claims on money that employees expect in the future, such as retirement accounts.

Although most companies enjoy cordial relationships with their clients, a single mistake in a project can change the dynamic instantly. Chances are that if your client suffers significant losses due to negligence on your part, it will seek compensation.


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