What is indemnity insurance?

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Indemnity insurance may sound like a complicated insurance product, but it simply refers to any insurance policy that provides financial coverage for unexpected damages. With an indemnity insurance policy, the policyholder pays a premium in exchange for this coverage. So, car insurance, home insurance and business insurance are all actually considered indemnity insurance. Bankrate’s insurance editorial team explains why indemnity coverage may be useful and who may benefit from indemnity policies.

What is an indemnity insurance policy?

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.)

If you’re unsure whether or not you need indemnity insurance beyond state-mandated auto coverage or lender-mandated home insurance, you may want to speak with a licensed insurance professional. Insurance is an individualized product, and speaking with an agent about your specific circumstances is the best way to get personalized advice.

Frequently asked questions

• What are common types of indemnity insurance?
  

  Outside of a standard auto insurance or home 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

• Is professional indemnity insurance tax deductible?
  

  Yes. Professional indemnity insurance can be counted as a business expense since insurance coverage is part of running a business, according to the IRS. You are allowed to deduct up to the full cost of your premium. For instance, if your company uses vehicles to transport products, you could deduct your commercial auto insurance premiums.

• Is indemnity insurance worth it?
  

  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 damage 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. The best course of action to decide if indemnity insurance is right for you is to consult a licensed insurance agent.