What is indemnity insurance?

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Indemnity is an agreement between two parties in which one party is responsible for compensating another for damages or losses they may incur. Indemnity insurance protects a policyholder from indemnity claims in exchange for monthly or annual premiums. If a professional or business causes damages or loss to a third party, an indemnity insurance policy can help cover the settlement and the policyholder’s legal fees.

Indemnity clauses are present in insurance contracts and business contracts, but indemnity insurance is something separate. You need indemnity insurance if you have agreed to indemnify another party and you want coverage for potential lawsuits that could arise from personal negligence. Here’s what you should know about indemnity agreements and how you could go about deciding whether to purchase indemnity insurance.

What is indemnity insurance?

Indemnity is one party’s promise to compensate another for potential losses or damages. Indemnification is the act of compensating another party after a loss has occurred. In an indemnity contract, the indemnitee is protected from liability and the indemnitor holds the indemnitee harmless.

For example, if a physician works for a hospital, they might be required to sign an indemnity agreement that holds the hospital harmless. The physician indemnifies the hospital so that the hospital can not be the target of any lawsuits brought as a result of the physician’s actions. Therefore, the physician may require malpractice insurance — which is a form of indemnity insurance — to protect themself from potential patient lawsuits.

How does indemnity work with auto insurance?

When you sign up for an auto insurance policy, you are the indemnitee and your insurance company is the indemnitor. Your insurance company agrees to compensate you or another party for losses or damages according to the policy’s terms and limits. Your auto insurance contract makes it your insurance company’s responsibility to indemnify you after you are involved in a covered accident. A car insurance company may cover a policyholder in the following ways:

  • Legal fees: If you have liability insurance, your insurance company could cover your legal fees in the event of a lawsuit brought by the harmed party.
  • Medical bills: Your liability insurance includes that your insurance company pays for medical expenses incurred by the other driver and their passengers in an accident, up to your liability limits. If you have medical payments coverage, your insurance company also agrees to cover the medical bills of you and your passengers.
  • Property damage repairs: If you cause an accident that results in physical damage, your insurance company will pay an indemnity to the other driver from your liability insurance. If you have collision coverage, you could also receive compensation for repairs to your vehicle.

Who should have indemnity insurance?

In terms of auto coverage, indemnity insurance from an auto insurance company is required in most states, excluding New Hampshire and Virginia. However, outside of state-required levels of liability, maintaining a full coverage policy can help avoid the financial burden of paying for vehicle damage out of pocket.

You may want to consider purchasing indemnity insurance if one of the following is true:

  • You consult with clients to provide advice (financial advisors, fitness professionals, private tutors, insurance agents, etc.)
  • You consult with clients to provide designs or frameworks (project engineers, web developers, graphic designers, etc.)
  • You belong to an industry association that requires indemnity insurance or another regulatory body requires it
  • You are self-employed and a client requires you to purchase indemnity insurance as part of your contract (writers, marketing consultants, etc.)
  • There is a possibility you could make mistakes in your profession that would lead to allegations of negligence (doctors, lawyers, etc.)

What is accidental death coverage?

Accidental death coverage, also known as double indemnity insurance, is a rider often available for life insurance plans. It could also be a stand-alone policy that provides a payout to the policyholder’s beneficiaries if the policyholder dies or is dismembered in an accident. Typically, policies provide this payout in addition to the death benefit. Accidental death and dismemberment coverage (AD&D) will not provide an indemnity if the insured dies of natural causes.

Frequently asked questions

What are common types of indemnity insurance?

Outside of a standard auto insurance policy, some other common types of indemnity insurance include:

  • Malpractice insurance, which protects physicians from lawsuits
  • Errors and omissions (E&O) insurance, which protects businesses and individuals from lawsuits arising over misrepresentation, negligence, inaccurate advice and errors and omissions in services
  • Directors and officers (D&O) insurance, which covers the personal assets of directors and officers if another party sues them for their actions in managing a company

Is professional indemnity insurance tax deductible?

Yes. Because the IRS considers insurance costs for a business as eligible for a write-off, professional indemnity insurance usually qualifies as a business expense and can typically be deducted the cost of your premiums on your tax return. Commercial auto insurance for business purposes may qualify as a professional expense, for example.

Is indemnity insurance worth it?

If someone files a lawsuit against you, the settlement could potentially wipe out your assets. Drivers encounter multiple risks on the road, such as collisions leading to serious injury or damage. With this risk in mind, indemnity insurance in the form of an auto insurance policy can be especially beneficial to protect your finances. Additionally, if you work in an industry that makes you vulnerable to lawsuits, indemnity insurance is often worth the expense.

Written by
Lindsay Frankel
Insurance Contributor
Lindsay Frankel has three years of experience writing for insurance domains such as Bankrate, Insurify, FinanceBuzz, NextAdvisor, Coverage.com, The Balance and The Simple Dollar. She has covered common insurance product lines such as auto, home, life, renters and small business insurance.
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