Indemnification Insurance Definition: What You Need to Know
Its where one party promises compensation for potential or actual losses or damages that another party causes in a contractual agreement.3 min read
The indemnity insurance definition is where one party promises compensation for potential or actual losses or damages that another party causes in a contractual agreement. This is commonly an insurance policy that protects business owners and professionals when they're at fault for events like misjudgment. Examples of this include errors, omissions insurance, and malpractice insurance. These policies reimburse or indemnify professionals from any claims made as business is conducted.
What is Indemnity Insurance?
Indemnity insurance is also known as professional liability insurance. It is a type of supplemental liability insurance that's specific to certain service providers or professionals who provide expertise, specialized services, and counsel. It's different from general liability or other types of commercial liability insurance, which mainly protects companies against property damage or claims of bodily harm. This insurance also protects against claims coming from potential negligence or failing to perform that causes a client's legal entanglement or financial loss.
Any client who has a loss has the right to file a civil claim, and the professional's indemnity insurance is in charge of paying litigation costs and damages awarded by the court in response. When it comes to mortgage loans, the borrower pays for the insurance policy, but the protection is meant for the lender in case the borrower does not pay the loan that they agreed to. If there's a default, the insurance company will pay off the loan balance and then claim the amount from the borrower, and can sue them if necessary.
An Overview of Indemnification
One kind of indemnity protection is the hold harmless agreement or indemnification clause, which is often seen in a construction setting. The Indemnitor will promise to defend and/or reimburse the indemnitee against suits or claims that are brought by a third party against the indemnitee, such as a contractor or vendor. The purpose of the clause is to transfer the risk of potential financial loss from one party to a different party. An essential part of the hold harmless clause is that this doesn't relieve the indemnitee from any liability to the third party.
The indemnitee can be found liable to the third party for the property damage or bodily injury. The agreement allows the indemnitee to have the legal right to collect from the indemnitor any damages that must be paid to the third party. Owners have specific duties that are non-delegable to make sure their property stays safe. If someone gets hurt on a construction site, for example, the owner will be the defendant if there's litigation.
An agreement lets the liability of the owner get transferred to the contractor as they're in control and possession of the construction site. Therefore the contractor is in a better position to control any risk of injury on the job site and is better suited to be in charge of the risk.
An Overview of Insurance
Insurance varies from indemnification in several ways. Contractual liability is one part of the commercial general liability policy and provides coverage for the insured's indemnity obligation. There is a contractual liability exclusion, where coverage is eliminated if there's an assumption of liability in an agreement or contract. This is put in place to get rid of coverage for contractual obligations for the insured, such as liability that comes out of hold harmless agreements or out of indemnity.
Where Insurance and Indemnification Meet
Insurance and indemnification both act to transfer risk, but in varying ways. An indemnitor's job to indemnify can go past the limits of the insurance company, but the terms of the indemnification clause can control how the insurance policy responds to indemnifying or holds an indemnitee harmless. The parts that overlap compared to the ones that don't can be an area of confusion when it comes time to verify that the indemnitor got the correct insurance coverage.
Some professionals need to have indemnity insurance, such as insurance agents, mortgage brokers, financial advisors, accountants, and attorneys. When they give out legal or financial advice, the professionals are possibly liable for inadequate performance or negligence even if they had the intent of goodwill when they performed the act.
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