What is Indemnity?

Robinhood Learn
Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.
Definition:

Indemnity is a comprehensive type of insurance compensation where one party agrees to protect the other from financial damages, loss, or liability.

🤔 Understanding an indemnity

An indemnity is security or protection against a financial loss. It can also refer to an exemption from liability for damages. It is a contractual agreement between two parties where one party agrees to compensate the other for any loss incurred as a result of the actions of another party. This often comes in the form of an insurance contract, where the insurer indemnifies the policyholder in return for premiums paid by the insured. Indemnity insurance can often be found in certain industries where professionals purchase indemnity insurance to protect themselves from personal liability.

Example

A common type of indemnity insurance is medical malpractice insurance. Malpractice insurance is purchased by health care professionals to protect themselves from personal liability in the event they are sued in the course of their job. The medical professional pays his or her insurer a premium, and they are then indemnified from the financial harm that may arise from a lawsuit against them.

Takeaway

Indemnity is like a get out of jail free card (that you usually pay for)...

A misfortune like your house burning down or your car being destroyed — or being sued for professional negligence — could wipe you out financially. But sometimes you can get out of this type of jam if you’ve paid an insurance company to indemnify you against such losses.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.
Sign up for Robinhood
Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory.

Tell me more…

What is indemnity insurance?

Indemnity insurance is a contractual agreement between two parties where one party promises to compensate the other for any potential losses. Indemnity insurance could also be referred to as an indemnification agreement (indemnification is the act of being protected from harm or loss by shifting liability to another party).

There are many different situations where indemnity insurance makes sense, both in business and personal settings.

There are some situations where indemnity insurance is mandatory. For example, certain professionals, such as those in the healthcare field, have to carry indemnity insurance.

Types of indemnity insurance

Malpractice insurance: This is a type of indemnity insurance purchased by healthcare professionals. Malpractice insurance would protect them in the event that a patient sues them for negligence or harm to a patient.

Errors and omissions insurance (E&O): E&O is a type of professional indemnity insurance that protects companies and their employees in case someone claims they were negligent or that their work was inadequate.

E&O covers professionals who provide advice or services — such as consultants, financial advisors, insurance agents, or attorneys.

Directors and officers insurance (D&O): D&O is a type of indemnity insurance that covers someone if someone sues them in their capacity as a director or an officer of a business or nonprofit organization.

In many cases, a company would purchase this type of indemnity insurance to cover the costs of both the director/officer and the company itself.

Indemnity health insurance: Indemnity health insurance, often referred to as a fee-for-service plan, is a healthcare plan that offers more flexibility than other health insurance plans, including allowing you to choose your doctor or health provider.

Homeowners insurance: Homeowners insurance indemnifies the owner of a home against the cost of repairing damage to the home — or against the home’s total loss. The homeowner pays a premium for this insurance. The terms can vary greatly depending on the contract.

Car insurance: Car insurance is also an example of indemnity insurance. First, the insurer is agreeing to cover any financial losses someone might incur if their car is damaged. In the case of car insurance, insurers typically also agree to accept liability if the insured driver is responsible for damage to another person’s vehicle. When two cars are in an accident, the insurance company for the “at fault” driver would typically agree to cover the costs for any damage to both parties.

How does indemnity work?

With indemnity insurance, the two parties (the insurance company and the insured) enter into an agreement where the insured passes their risk along to the insurance company in exchange for an insurance premium.

Then, if the insured suffers a loss that the indemnity agreement covers, the insurance company is on the hook for those costs.

How is indemnity paid?

Indemnity is usually paid in the form of a monetary payment.

For example, let’s say someone sues a doctor for negligence, and that doctor has to pay damages. The doctor’s indemnity insurance (aka malpractice insurance) provider would be responsible for paying for damages on behalf of the doctor, per the agreement the two parties had.

Another example would be indemnity health insurance. The parties have agreed ahead of time that the insurer will cover certain expenses related to medical care. So when the insured party has medical expenses due, the insurance provider covers them (or reimburses the insured party for their costs).

How do I know if I need indemnity insurance?

There are a couple of questions you can ask yourself to determine if you should purchase indemnity insurance. Any financial product has potential risks and benefits; consult with an advisor.

  • Do you provide professional advice and consultancy? More specifically, can someone sue you if you give inaccurate advice? Even in professions where it’s not required, you may wish to consult with an advisor.
  • Are you required to have it? There are some jobs where you’re required to have indemnity insurance. As we’ve discussed, medical professionals fall under this category. The requirement might come from your state, a professional association you’re a part of, or a licensing body. If you think this might be you, your employer’s human resources would be an excellent place to start.

What is the best indemnity insurance?

If you’re on the hunt for some professional indemnity insurance, there are a few things you should keep in mind before choosing the right insurance company for you.

First, you can start by asking others in your field for a recommendation. If you’re in a field where this type of insurance is common or even required, then odds are someone will have a suggestion or two.

Next, it’s essential to thoroughly read an indemnification agreement before you agree to it. Some insurers might offer a more comprehensive policy than others. The last thing you want is to face a lawsuit and find out that your policy doesn’t fully cover your situation.

After that, ask insurers about the policy’s deductible. Like other types of insurance, professional indemnity insurance often comes with a deductible. You want to make sure this is an amount you could reasonably afford in the event of a lawsuit.

You may wish to consult with an insurance broker or other financial advisor.

What is the difference between an indemnity health-insurance plan and a preferred provider organization (PPO)?

Indemnity and PPO (preferred provider organization) are both types of health insurance.

A key difference between indemnity health insurance and PPOs is that indemnity allows you to choose your doctor. You aren’t required to go somewhere that is “in-network.”

Additionally, you don’t have to get a referral from a primary care provider to see a specialist. Because of this, you have greater control over your healthcare.

However, because there is no network, your insurance company may not have the negotiated lower rates with medical providers that would exist with a PPO.

Indemnity health insurance plans are also referred to as fee-for-service plans. Your insurance company determines what would be a reasonable fee for a particular service, and that is the amount that your insurance company reimburses you.

This type of plan requires research on the part of the insured because you want to make sure that your medical provider charges fees for their services that are in line with what your insurance company reimburses.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory.

20200221-1096411-3300851

Related Articles

You May Also Like

The 3-minute newsletter with fresh takes on the financial news you need to start your day.
The 3-minute newsletter with fresh takes on the financial news you need to start your day.


© 2020 Robinhood Markets, Inc. Robinhood® is a trademark of Robinhood Markets, Inc.

This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Robinhood Financial LLC provides brokerage services. Robinhood Securities, LLC, provides brokerage clearing services. Robinhood Crypto, LLC provides crypto currency trading. All are subsidiaries of Robinhood Markets, Inc. ('Robinhood').

1200251