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What Is Indemnity Insurance?

Malpractice insurance and deferred compensation are two forms of indemnity insurance.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 October 2014
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Indemnity insurance is insurance coverage that compensates policyholders for all or part of the expenses incurred when a situation covered by the terms of the policy takes place. The idea of this type of coverage is to alleviate financial stress that occurs due to litigation or other circumstances that are outside the control of the insured party. Some forms of indemnity insurance include malpractice insurance and deferred compensation indemnity insurance.

One of the best examples of indemnity insurance has to do with malpractice coverage. This type of coverage protects medical professionals as well as individuals associated with other professions from being financially devastated as the result of some action taken during the course of performing their duties. For example, if a patient of a physician is physically harmed as the result of the quality of treatment administered by that physician, the possibility of a lawsuit is highly possible. In the event a judgement is obtained against the physician, the indemnity insurance will cover most if not all of the judgement amount. This allows the physician to maintain his or her practice, without creating any financial hardship on that practice.

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Company executives also sometimes make use of indemnity insurance as a means of protecting their future interests in the event that their employers should file for bankruptcy. The insurance helps to partially or completely compensate the insured party for any salary or other forms of compensation that the company would have provided for the remainder of the current employment contract, if it had not filed the bankruptcy action. In the event that the bankrupt company does remain functional in some form and provides partial compensation to the executive, the indemnity insurance is likely to pay a reduced benefit, while still allowing the insured party to maintain the same standard of living.

Because of the nature of indemnity insurance, the premiums associated with the coverage are usually quite high. Proponents point out that while the cost per year does amount to a significant sum, the amount paid out if a qualified event does take place can far exceed the cumulative amount of the premiums. Even if a claim is never filed on the insurance, the protection afforded by an indemnity policy can make it much easier for a professional to focus more on performing his or her duties effectively and responsibly, rather than being distracted by the fear of some potentially career-crippling event and the ensuing litigation.

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