The purpose of indemnity insurance is to protect business owners in the event of negligence on the part of the business or its employees. An example of such a policy is medical or legal malpractice insurance, also referred to as errors and omissions insurance. Monetary damages awarded to a claimant are paid by the issuer of the policy, up to an amount defined in the policy. Another type is health indemnity insurance, which is a limited coverage used by people who are between health plans.
Definition
"Indemnity," as defined by Webster's dictionary, is "security against hurt, loss, or damage." Its second definition is "exemption from incurred penalties or liabilities."
Professional Indemnity Insurance
Professional indemnity insurance protects a business from claims made against it by a third party that has experienced injury, damages or loss directly related to the negligence, through error or omission, of a company. Policies usually last for one year. The premiums for these policies represent a large chunk of companies' operating expenses. The policies are commonly used by companies that deal in accounting and financial services, consulting, medicine, information technology and legal representation.
Private Indemnity Insurance
This is also referred to as "fee for service" insurance. It is obtained by individuals either on their own or through an employer or trade organization. It provides limited medical protection, and is typically called a "preferred provider plan."
Importance of Coverage
Companies need to protect themselves against not only authentic claims of damages, but also false claims. Policies cover legal expenses in the event a company is taken to court over an error or omission.
Types of Professional Indemnity Insurance
There are generally two types: voluntary and involuntary. Involuntary policies are required by state or federal law for certain professions, including medical and legal. Involuntary policies must be current in order for professional licenses to remain active in these industries.
