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Carpenter in his shopRunning a business or pursuing certain professional career paths often means having the right insurance in place to protect yourself against liability claims. Indemnity insurance is one type of business and professional insurance you may consider purchasing. This type of coverage is similar to other insurance products in that you pay premiums into the policy and the policy pays out money when someone successfully files a claim. If you’ve never heard of indemnity insurance or you’re unsure whether you need it, here’s a closer look at how it works. An expert financial advisor in your area can also help you determine whether indemnity insurance fits into your overall financial plan.

Indemnity Insurance, Definition

Indemnity insurance is a type of professional liability insurance coverage. To indemnify means to provide protection against financial losses. The purpose of having indemnity insurance is to protect yourself or your business professionally against liability claims associated with mistakes, misjudgments or malpractice.

This is separate from other types of insurance you might need to protect your business or professional career. For example, you may also need to purchase general liability insurance, worker’s compensation insurance, property insurance, business interruption insurance or vehicle insurance, depending on how your business operates. If you run a home-based business, you’d also need additional homeowners’ insurance.

How Indemnity Insurance Works

Indemnity insurance documentsIndemnity insurance has a single purpose: to protect you against liability claims associated with misjudgments, malpractice or professional errors. It’s comprehensive coverage that pays out compensation for damages or losses when someone brings a liability claim against you. Specifically, that means claims that are brought when someone experiences financial losses in connection with your professional or business services. So for example, if you’re a doctor and you misdiagnose a patient’s illness which results in their condition being left untreated and worsening, they may be able to file a malpractice claim against you if they experienced financial losses.

If they’re able to secure a judgment in civil court, your indemnity insurance policy could be used to cover any damages they’re awarded. Indemnity insurance can also pay for a claimant’s legal fees and court costs. This helps you and your business avoid having to pay for legal claims out of pocket.

Indemnity insurance doesn’t cover claims where property is lost or damaged or bodily injury occurs. So if one of your business vehicles was involved in a car accident, for instance, any associated personal injury claims might be paid by your car insurance policy rather than an indemnity policy. Indemnity insurance also doesn’t cover liability claims that involve unethical business or professional practices.

Like other kinds of business insurance, indemnity coverage is only good as long as the policy is active and the premiums are paid. But you may be able to purchase an endorsement or add-on that allows the policy to continue paying claims even after it expires.

Who Needs Indemnity Insurance?

Indemnity insurance is designed for businesses and individuals that offer professional services and/or advice. Some of the most common types of businesses in which indemnity insurance is necessary include:

Generally, if you run a business that offers specialized advice you may need indemnity insurance. And these policies can take different names, depending on what line of work you’re in.

For example, a financial advisor who sells annuities, insurance or other investment products must have errors and omissions insurance. This type of indemnity policy protects the advisor against liability claims if a client brings a case related to negligence, errors, omissions or misrepresentations. Real estate brokers may also use this type of insurance to cover themselves against liability claims when a home purchase or sale transaction goes south.

Doctors can get indemnity protection by purchasing malpractice insurance. This type of coverage protects physicians and other medical practitioners against liability claims related to negligence. Malpractice claims can be brought when a patient or a patient’s loved ones believe that a doctor’s actions or advice lead to mental and/or physical injury, illness or death.

How to Purchase Indemnity Insurance

There are numerous insurance companies that sell indemnity insurance policies and if you need coverage, you can start your search for it online. When comparing indemnity insurance policies, it’s important to keep in mind:

  • How much coverage you need professionally
  • What types of claims are (or aren’t) covered by the policy
  • How much you’ll pay in premiums for coverage
  • How long the policy will remain in effect
  • What type of risk profile your business or profession poses

That last part is important particularly when it comes to determining how much you’ll pay for indemnity insurance. If you’re a doctor, attorney or financial advisor, for example, those professions may be viewed as riskier from the insurance company’s viewpoint compared to something like an IT consultant or a real estate broker.

Generally, the riskier your business is in the eyes of insurers the more you’ll pay for indemnity insurance since the likelihood of the insurance company paying out a claim is greater. Remember also to ask about endorsements when establishing an indemnity insurance policy, which can extend your coverage period even after the policy ends.

The Bottom Line

Gavel and paper money

If you run a business or work in certain professions, indemnity insurance coverage can be a valuable financial resource to have. This type of insurance can make it possible to stay in business and avoid draining your financial reserves if a liability claim is successfully brought against you. And if you’re working with financial, legal or medical professionals, knowing that they have indemnity coverage can be reassuring if you’re concerned about the possibility of financial losses.

Tips for Investing

  • Consider talking to a financial advisor about the benefits of having indemnity insurance if you run a business or work in one of the professional fields mentioned earlier. If you don’t have an advisor yet, finding the right one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool can help you connect with professional advisors locally. It takes just a few minutes to answer an online questionnaire and get recommendations for advisors in your area. If you’re ready, get started now.
  • You may also want to consider key person insurance, which can help your business continue running if you or another key person in your business passes away.

Photo credit: ©iStock.com/Obradovic, ©iStock.com/designer491, ©iStock.com/unomat

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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