If you’ve heard of the term indemnity, you may be wondering, “what is indemnity insurance?” Indemnity is an agreement between two parties in which one party is responsible for compensating another for damages or losses they may incur. Therefore, indemnity insurance can help protect a policyholder from indemnity claims in exchange for monthly or annual premiums. If a professional (such as an accountant, attorney or mortgage broker) or a business causes damages or loss to a third party, an indemnity insurance policy can help cover the settlement and the policyholder’s legal fees. Bankrate’s breakdown can help you understand when to consider indemnity insurance.

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Key takeaways

  • Indemnity insurance can help protect a policyholder from financial loss for damages in exchange for monthly or annual premiums.
  • In addition to car insurance, another common type of indemnity insurance is malpractice insurance.
  • Professional indemnity insurance is tax-deductible.

What is indemnity insurance?

So, how does indemnity insurance work and what does indemnity insurance cover? Indemnity is one party’s promise to compensate another for potential losses or damages, while indemnification is the act of compensating another party after a loss has occurred. An indemnity contract protects the indemnitee from liability and holds them 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 medical 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 insurer might cover your legal fees in the event of a lawsuit brought by the harmed party from a covered accident.
  • 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 would 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?

Having indemnity from a car insurance company in the form of coverage is required in most states. However, outside of state-required levels of liability, carrying higher liability limits than the required minimums and 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, financial advisors, etc.)

What is accidental death coverage?

Accidental death coverage is a rider that is often available for life insurance plans or can be a standalone policy that provides the policyholder’s beneficiaries with a payout if the policyholder passes away. Many employers offer accidental death and dismemberment (AD&D) coverage as a free benefit to employees. You may also hear it referred to as double indemnity insurance. Policies usually provide this payout in addition to the death benefit.

AD&D will not provide an indemnity if the insured dies of natural causes.

Frequently asked questions

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

      • Medical 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 board of directors members and company officers if another party sues them for their actions in managing a company
    • 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.

    • Indemnity insurance is often beneficial in protecting your finances, especially in the event of a potential lawsuit.

      Drivers are susceptible to accidents and collisions, which can lead to property damages or serious injuries. If you’re involved in an accident and the other involved party files a lawsuit against you, indemnity insurance in the form of car insurance could protect your finances from being wiped out from the settlement.

      Additionally, if you work in an industry that makes you vulnerable to lawsuits, indemnity insurance is often worth the expense.

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