What is Indemnity Insurance and How It Works?

Have you heard about indemnity insurance? It is one of the oldest types of insurance. It started a long time ago with marine insurance, where merchants used to insure their ships and goods, so that if anything happened when the ship sailed, they would get money to cover the loss.

Indemnity insurance is a contractual agreement in which your insurance company or the insurer, promises to compensate the insured or policyholder, for specific losses or damages. The loss is covered only up to the policy limit and in exchange, the insured has to pay a premium. Bajaj General Insurance offers comprehensive indemnity-based policies for individuals, professionals, and businesses. Explore our policies that offer flexible customisation, digital convenience, and strong claim support.

Definition of Indemnity Insurance

Indemnity insurance is a type of insurance that protects you from financial loss if you cause damage, make a mistake, or are held responsible for someone else’s loss. In simple words, it pays money to cover your loss or someone else’s loss, so you don’t have to pay from your own pocket.

Think of it as a safety net: if something goes wrong, the insurance company steps in to compensate you financially. It’s all about compensation for losses, not making a profit.

Key Features of Indemnity Insurance

The important features of indemnity insurance are:

1. Protection against financial loss: Indemnity insurance protects you against money loss. The main idea is to restore you to the same place that you were before the occurrence of the loss.
2. Covers specific risk only: Indemnity insurance doesn’t cover everything. It only protects against risks that are written in your policy. For example, a professional indemnity policy protects a lawyer or doctor against mistakes in work. A liability indemnity policy covers accidental damage to someone else’s property. Anything not mentioned in the policy will not be covered.
3. Premium payment is required: To have indemnity insurance, you must pay a premium to the insurance company. As long as you pay the premium on time, your insurance stays active, and if you miss payments or stop paying, you lose coverage. It is thus a small price for big protection.
4. Protection for third parties: Indemnity insurance also protects from third-party liabilities. For example, if you accidentally damage someone else’s property, indemnity insurance pays the third party and provides you peace of mind.
5. Flexible coverage options: Indemnity insurance is flexible as you can choose the amount of coverage, the type of risks you want to cover, and the duration of the policy. This flexibility helps you get insurance that fits your needs and budget.

How Indemnity Insurance Works?

Here is how indemnity insurance works.

1. Purchasing the policy and understanding the risks covered

When you buy a policy, the insurance company agrees to cover certain specific types of risks. This could be property damage, third-party claims, professional mistakes or negligence if you are a doctor, lawyer, or consultant. The insurer promises that if a covered event happens, they will help you financially. So, the first important step is to know what your policy includes, because only those risks are protected.

2. Paying premium amount

The next step is to pay the premium amount which helps to keep the policy active. The premium amount needs to be paid monthly or annually, depending on your insurer’s policy. The premium amount depends on the type of coverage, the value of risks, and your profession or business. For example, a doctor’s professional indemnity insurance will have a different premium as compared to a small business that covers third-party liability. Ensure you pay the premium regularly for continued coverage.

3. Informing your insurer in case of loss

Accidents, mistakes, or damages can happen at any time. In such a case, you must notify your insurance company immediately and submit necessary documents, like proof of the incident, bills, or legal notices to support your claim.

4. Insurer assesses the claims

The next step is assessment of claims by the insurer to ensure that the claim is legitimate. Your insurance company will review the claims that you have submitted, extent of damage, and review the evidence. Insurers assess whether the event is covered under your policy and verify all details and circumstances.

5. Insurer pays the compensation

After the assessment is complete, the insurer provides compensation in case the claim is approved. The compensation is paid either to you or to the third-party if your policy covers liability claims and helps you to be in the same financial position that you were in before the loss occurred. This is essentially the principle of indemnity.

Types of Indemnity Insurance

The different types of indemnity policies cover different types of risks:

1. Professional Indemnity Insurance

This insurance is for people who offer professional services. It helps to cover legal costs and compensation if a client loses money because of your mistake or negligence.

Example: Doctors, lawyers, architects, and consultants use this insurance.

2. Property Indemnity Insurance

This type of insurance protects your property from unexpected events. It covers damage caused by fire, theft, natural disasters, or other accidents.

Example: It is suitable for homeowners or business owners to protect their property.

3. Liability Indemnity Insurance

Liability indemnity insurance protects you if someone is hurt or their property is damaged because of your actions. It protects you from large financial claims from third parties.

Example: If a visitor slips in your shop and gets injured, this insurance can cover the medical bills and legal costs.

4. Marine and Transit Indemnity

If you are transporting goods, this insurance covers loss or damage during transit. It protects against risks like accidents, theft, or damage at sea, by road, or by air.

Example: It is used by businesses that send products or raw materials frequently.

5. MSME Insurance With Indemnity Features

Micro, Small, and Medium Enterprises can benefit from indemnity insurance and purchase this policy to cover property damage, accidents to employees, or liability claims, so that they can continue running smoothly even after unexpected losses or accidents.

6. Cyber Insurance

Suppose an IT firm experiences a cyberattack. Cyber insurance includes third-party liability for claims from affected customers or other parties due to privacy or network security breaches.

Conclusion

To sum up, to indemnify means to compensate for loss or damage, and indemnity insurance is to restore or place the policyholders to the same financial position where they were in before they suffered loss.

Explore insurance policies by Bajaj General Insurance and acquire your safety net today.

FAQs

Q1. How does indemnity insurance work?

Indemnity insurance works in the following manner: You pay a premium and if you suffer a loss that is covered under the policy, the insurer compensates you.

Q2. Who should buy indemnity insurance?

Professionals, business owners, and MSMEs who may face mistakes, accidents, or liability claims should buy indemnity insurance.

Q3. What are the types of indemnity insurance?

The types of indemnity insurance are: Professional, property, liability, marine & transit, MSME, and cyber insurance.

Q4. What does indemnity insurance cover?

Indemnity insurance covers only the risks mentioned in your policy like damages or third-party losses.

Q5. Do I need to pay regularly for indemnity insurance?

Yes, you need to pay the premium regularly to keep your insurance policy active.

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***Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making any related decisions.