This article has been written by Naveen Talawar, a law student at Karnataka State Law University’s law school. The article deals in detail with an overview of indemnity insurance along with professional indemnity insurance.

It has been published by Rachit Garg.

Introduction

Businesses require a variety of insurance policies, from general liability to property. They all serve different purposes, but they all work to prevent the insured business from having to pay the full cost of suffering losses. This is referred to as “indemnity insurance.” Indemnity insurance is a type of insurance that provides a guarantee from the insurance company that it will cover any losses or damages the policyholder suffers. It is intended to protect professionals and business owners when found accountable for a specific event, such as misjudgment or malpractice. Financial advisors, insurance agents, accountants, mortgage brokers, and attorneys are among the professionals who are required to carry indemnity insurance. Other professionals who fall under this category include those who work in the legal and financial sectors.

Indemnity insurance : an overview

Indemnity insurance, which is a binding contract between the policyholder and the insurance provider, obligates the insurance company to pay for financial losses that result from covered claims in exchange for premium payments from the policyholder. Paying for any losses or harm that transpires is known as indemnifying someone. In the context of insurance, indemnity also refers to protection from legal responsibility for operations or actions. The damages that result from a covered loss are therefore covered by an indemnity insurance policy.

Indemnity insurance refers to insurance protection against financial losses brought on by professional negligence for an insured. Similar to other types of insurance, this one offers protection in exchange for recurring premium payments from the insured. For instance, a client might file a lawsuit against a wealth management company, claiming they caused them financial harm by following their advice. If the company has indemnity insurance, it may be able to cover all financial losses, including any associated legal costs.

The working of indemnity insurance

There is always a risk of financial loss, regardless of the industry or profession. Professionals like doctors, lawyers, and financial advisors all place a high value on and understand the significance of indemnity insurance. The purpose of insurance is to reduce one’s liability risk arising out of one’s profession. An indemnity is a comprehensive type of insurance compensation for losses or damages. In a legal context, it can also mean an exemption from responsibility for the damage. In return for the policyholder’s premium payments, the insurer guarantees that it will make the insured party whole for any covered loss. For particular professionals or service providers, indemnity insurance is an additional type of liability insurance.

Indemnity insurance protects a company or individual from financial losses brought on by professional negligence, mistakes, or malpractice. The professional’s insurance protects them in the event that their client sues them for causing them to suffer a financial loss as a result of their bad performance. In other words, it helps shift responsibility to a different party. A client’s financial loss or legal entanglements could result from possible negligence or failure to perform, and indemnity insurance guards against such claims. 

Clients who experience losses may bring a civil claim. In response, the professional’s indemnity insurance will cover both the cost of the legal battle and any damages awarded by the court.  The costs of an indemnity claim, such as court fees and settlements, are covered by indemnity insurance, just like any other type of insurance. The insurance coverage amount is determined by the terms of the individual contract, and the insurance’s cost is influenced by a number of variables, including the frequency of indemnity claims.

Professionals who require indemnity insurance

Only some professions are required to obtain indemnity insurance, which frequently occurs in the form of malpractice or errors and omissions insurance, even though most insurance policies are viewed as indemnity agreements. It typically applies to professional service providers who could commit a mistake that causes the client who requires indemnity insurance to suffer loss or harm. Although maintaining their licences requires that these professionals purchase professional liability insurance, every business can obtain indemnity insurance, whether for professional services or other business liability or commercial property needs.

Some professionals are required to have indemnity insurance. These experts include those working in the financial and legal sectors, including financial advisors, insurance brokers, accountants, and attorneys. Despite their best efforts, these professionals may be held liable for negligence or inadequate performance when providing financial or legal advice.

In the financial services sector, a professional is required to carry out errors and omissions insurance if their advice leads to the purchase of an investment or insurance product. For instance, accountants may be held liable for negligently advising a client on tax issues that led to a fine or additional taxes.

In the medical profession, professional indemnity insurance is required in the form of malpractice insurance. Medical professionals are protected by malpractice insurance from legal actions brought by patients who suffer physical or mental harm as a result of their negligence.

In addition to an indemnity claim, indemnity insurance also covers court fees, costs, and settlements.

Indemnity insurance is frequently bought by executives to safeguard their deferred compensation plans from litigation or bankruptcies. Due to their vulnerability to claims of failure to perform, other professions like contractors, consultants, and maintenance specialists carry indemnity insurance as a matter of course.

Types of indemnity insurance

1. Malpractice insurance: It protects medical professionals from legal action. 
2. Errors and omissions (E&O) insurance: It protects individuals and companies from claims of negligence, misrepresentation, errors and omissions in services. 
3. Directors and officers (D&O) insurance: It protects the personal assets of directors and officers in the event that a third party sues them for their management of a company.

Features of indemnity insurance

1. It covers civil cases in which a client of a service provider seeks damages or other compensation from the service provider. 
2. Compensation, settlements or damages, legal costs, and run-off coverage are all included in its scope of coverage. 
3. Indemnity insurance is available to service providers working in the fields of medicine, health, finance, accounting, law, and construction.
4. The business incurred legal costs (court and lawyer fees) and settlements in defending the claimant’s indemnity lawsuit; these costs were paid for by the insurance. 
5. The insured must continue to pay premiums to the insurance company regularly to receive the benefits of the insurance policy, which is in effect until it expires. 
6. The insurance may occasionally include a policy with an endorsement that extends protection to certain acts that take place during the policy’s term, even after the policy’s expiration date. 
7. Cases that fall under the indemnity insurance definition are low risk, but they can still be expensive if they happen.

Life insurance versus indemnity insurance

Life insurance is merely a contract to pay a specific amount of money in the event of a person’s death (or upon maturity), considering periodic payments of a specific amount. The insured merely pays the premium to the insurer to secure a specific sum payable to him or his representatives in case of death at regular intervals. Life insurance and indemnity insurance are very similar to one another and work on the same principles of putting the party who suffered a loss or injury back in their original position. However, life insurance and indemnity have key differences.

Policies offering indemnity and life insurance provide coverage for losses to an insured party in exchange for premiums up to a predetermined amount. However, when an insured party passes away, life insurance pays out a lump sum to the chosen beneficiaries. In contrast to a contract of indemnity, the payout, known as a death benefit, is the full amount of the policy rather than the sum of the actual claims.

Life insurance does not relate to a contract of indemnity because the insurer only agrees to pay the sum assured in the event of the insured’s death or maturity rather than making a promise to compensate the insured for any losses. A life insurance policy is not an indemnity because it is only a contract to pay a predetermined amount, known as the “sum assured,” in the event of death. The insured pays the insurer the premium to ensure that a certain amount will be paid to him or his heirs in the event of his death. Since the loss resulting from death cannot be quantified in terms of money, there is no inquiry into indemnification in such a case.

What is hospital indemnity insurance

One of the best defences against both anticipated and unforeseen medical costs is health insurance. Some people base their plan selection on the cost of the premiums, while others are more focused on the coverage. Indemnity insurance plans are types of medical insurance in which the insurer pays or reimburses the actual medical expenses incurred. A person’s or his family’s financial security shouldn’t be a concern when it comes to their health in the event of unexpected or lengthy hospital stays. Hospital indemnity insurance is useful because it prioritises patient recovery over medical expenses. 

Hospital indemnity insurance helps cover hospital stay costs as a supplement to a person’s primary health insurance.  Depending on the plan, hospital indemnity insurance provides cash payments to assist a person in covering any additional costs that might arise while they are recovering. Usually, insurance policies pay according to how many days a patient is hospitalised. A patient can still receive payments from their hospital indemnity insurance plan for supplemental costs incurred while recovering even if their medical insurance covers the majority of their hospitalisation.

Benefits of hospital indemnity insurance 

• Wide coverage: A hospital indemnity plan may be an all-inclusive medical insurance plan or a standard health insurance plan. Further, it can also be an individual plan, a family-floater plan, or a senior citizen plan. Depending on the insurance provider and the specific policy a person chooses, the actual scope, extent, and nature of coverage offered under an indemnity insurance plan will differ.
• An extensive network of cashless hospitals: For hassle-free cashless care, health insurance companies that include indemnity benefits in their plans collaborate with a wide network of hospitals. For instance, Tata AIG’s Medicare line of medical insurance plans provides cashless hospitalisation and treatment with indemnity benefits through a vast network of more than 7200 hospitals.
• Low cost of purchase: The most effective hospital indemnity insurance packages include a deductible or co-payment option, allowing the policy holder to decide how much of the claim will come out of their own pockets. The hospital’s liability decreases with a higher deductible or co-payment. By charging low premiums, it transfers this benefit to the policyholder. As a result, hospital indemnity plans enable policyholders to select a policy that is within their means while also lowering their overall premium expenditure.

Fixed indemnity insurance plan

Any medical expenses incurred by the policyholder are covered by a fixed indemnity insurance plan, which provides health insurance. These plans will reimburse the policyholder for any actual costs they incurred while they were hospitalised, up to the amount insured under the policy. For instance, if a policyholder selects a sum insured of Rs. 4 lakh and is given a hospitalisation bill for Rs. 1.5 lakh, the insurance provider will reimburse the policyholder with Rs. 1.5 lakh. During the policy term, the remaining funds will be held in reserve for a subsequent claim. 

An indemnity plan requires the policyholder to submit hospital bills outlining the costs incurred throughout the hospital stay. The well-known health insurance product “Mediclaim” is an example of an indemnity insurance plan. Plans for fixed indemnity insurance generally have deductibles, which are fixed amounts that have been predetermined. For hospitalisation costs, the policyholder is required to pay the deductible amount, and the insurance company will cover the balance up to the sum insured amount. In some indemnity-based plans, there is no deductible; instead, the insurer covers the entire cost of the hospitalisation expense (up to the sum insured limit).

Fixed indemnity insurance plans, which normally have connections to several partner hospitals and medical facilities, offer flexibility when it comes to hospitals and healthcare professionals. Even though medical expenses are covered, policyholders can select the hospital or clinic they want to go to based on the kind of treatment they need. These plans also cover a variety of illnesses and treatments, as well as the full cost of hospitalisation. While most hospitalisation costs are covered by fixed indemnity-insurance plans, there are some that are not. They include the price of medications and post-operative care. Since indemnity plans have deductibles (unless otherwise specified), the policyholder is responsible for a portion of the costs.

Professional indemnity insurance

As the world became a global village, new doors for professional fields in India were opened by the introduction of liberalisation, privatisation, and globalisation policies in 1991. With the addition of foreign players, every service transaction has a high monetary value. In India, the “Professional Indemnity Insurance” chapter became well-known as a result of the massive increase in risk associated with the liability for professional services. Professional indemnity insurance (PI) secures the insured professional against financial loss resulting from the professional’s negligent act, mistake, or omission that harms the client or a third party.

It generally takes the form of a contract between the professional, who is the insured party, and the insurance provider, who is the insuring party. It serves as security for both professionals and their clients, protecting them from a variety of financial losses. It includes professionals like lawyers, doctors, accountants, management consultants, interior designers, architects, and brokers.

Origin and importance

Professional liability insurance has received enormous significance in the aftermath of the important decision in Hedley Byrne and Co. Ltd. v. Heller and Partners Ltd. (1963). It relates to a third party’s financial loss brought on by a professional’s incautious misstatement. Hedley, an advertising agency, was interested in learning more about the credit standing of EasiPower Ltd., one of their clients. They contacted Heller Ltd.’s bank to obtain a report on their client’s financial situation, which appeared to be in good shape. After the company’s liquidation, Hedley sued Heller Ltd. for negligently disseminating false information. Heller Ltd. argued that liability was not admitted and that they were not owed a duty of care.

The court determined that their relationship was sufficiently proximate and that Heller Ltd.. had a duty of care to take when providing the information that Hedley Ltd. relied upon. As a result, Heller Ltd. was held liable for its carelessness. After this important ruling, a third party could file a lawsuit against any individual or entity for negligence in giving advice and be awarded damages even if there was no contractual arrangement between the third party and the professional in question.

This decision broadened the market for professional liability insurance globally and completely changed the way that the US views professional liability. The application of required professional indemnity insurance has been broadened as a result of this legal ruling in many different nations. For example, lawyers are required to purchase lawyers’ liability insurance in the USA, Germany, Belgium, Denmark, England, Australia, and Singapore.

Although professional liability insurance (PLI) is not specifically regulated in India by statutes or laws, an indemnity contract is defined as “A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person” in the Indian Contract Act, 1872. Similarly, when professionals don’t use the care that is expected of them while providing their services, they are exempt from liability under professional liability insurance. Depending on the nature of the profession, a minimum standard of care equivalent to that of a reasonably prudent person is required.

The term “professional liability insurance” is addressed by the Companies (Indian Accounting Standards) Rules, 2015 in India. In accordance with the Insurance Regulatory and Development Authority of India (Insurance Brokers) Regulations, 2018, the insurance broker is also required to buy a policy for professional indemnity insurance. The concept of professional liability insurance was primarily developed in the United States, and it is not very well known in India. It gained momentum after professional liability laws in the US took effect, requiring them to acquire indemnity policies to protect themselves from liabilities.

Coverage

Legal responsibility for the financial loss incurred by the client as a result of a breach of professional duty is covered by professional indemnity insurance. The amount of the insurance claim includes both the damages that are granted to the insured party and the costs and expenses incurred in defending the insured. The majority of civil liability listed in the insurance policy is protected. The coverage can go as far as group insurance, such as a law firm purchasing group professional indemnity insurance to protect all employees from any claims. Before submitting an insurance claim for professional liability, the loss or damage must have occurred.

Types of professional liability insurance

• Claim-based: It provides coverage to the insured party for any occurrence during the policy period, and a claim is also made while the insurance is in effect. In this case, the insurance policy’s inception date—also known as the retroactive date—becomes its official date. Every year when the policy is renewed, the date stays the same.
• Occurrence-based: It offers coverage for occurrences that took place throughout the course of the policy year, regardless of when the claim is made. For the duration of the insurance policy, it offers distinct coverage every year. Whether the policy was in effect at the time the claim was filed is irrelevant. It only demands that the policy was in effect at the time the alleged events took place. As a result, occurrence-based insurance is generally more expensive than claim-based insurance.

Benefits of professional indemnity insurance

The benefits of acquiring professional indemnity insurance include the following:

1. Financial protection from lawsuits: If a person has professional indemnity insurance, the insurer will cover all defence costs, which can prevent financial losses from lawsuits from disrupting his business. Errors and omissions insurance covers defence expenses like legal expenses, court costs, the cost of filing legal documents, etc. In case of legal repercussions resulting from error and omission claims, it offers financial protection.
2. Peace of mind: More assurance when providing professional services results in more successful outcomes. It is very stressful and expensive for an individual and their organisation if they are held accountable or blamed for the client’s financial or reputational loss as a result of their advice or consultation. However, professional indemnity insurance lends a helping hand in this situation and manages all of his stress by providing the necessary financial assistance.
3. Increases credibility: A person’s reputation and brand image are improved by professional indemnity insurance. It gives his clients and investors the peace of mind that whatever professional services they are providing, professional indemnity insurance is there to offer solid support if any discrepancies occur. A professional is responsible for the work he performs, and if he has professional indemnity insurance, he gives his client peace of mind while working with him.
4. Professional reputation protection: Professional indemnity insurance helps in defending the professional reputation in the event of a claim, much like credibility. If claims are not handled promptly and competently, they can instantly ruin a company’s reputation. The insurance makes sure the company hires the best legal team and provides guidance on how to handle the claim. No insurance would be helpful if a company’s negligence actions were intentional and the business was at fault, even though this is the case if the business’ negligence were accidental.
5. Saves time: Another advantage of professional indemnity insurance is that it can prevent a complete pause and save time. Professional indemnity insurance enables businesses and professionals to carry on with their operations. Further, insurance facilitates the handling of claims and offers qualified assistance to speed up the procedure. While handling claims or lawsuits is necessary, this does not mean that other tasks should be put on hold. The insurance enables a person to proceed from the claim without suffering any harm to your company.
6. Additional benefits: To improve its efficacy and guarantee that it covers all potential legal claims, the Professional Indemnity Insurance Policy can be extended to cover defamation, document loss, dishonest libel and slander. These advantages guarantee a professional’s total protection as they work to account for all foreseeable risks.

Exclusions in professional indemnity insurance 

The following are a few of the general exclusions of professional indemnity insurance

1. If while performing the service, the insured is under the influence of drugs or alcohol.
2. Legal responsibility arises from wrongdoing that results in personal injuries, such as wrongful detention, false arrest, slander, libel, or defamation.
3. Any loss resulting from hostilities, war, invasion, an act of a foreign enemy, civil war, insurrection, rebellion, revolution, mutiny, military or usurped power, riot, strike, lockout, military or popular uprising, civil commotion, martial law, or looting, sacking, or pillaging in connection therewith, confiscation, or destruction by any governmental or public authority, whether or not war has been declared.
4. Fines, penalties (civil, criminal, or contractual), punitive damages, exemplary damages, treble damages, or any other damages resulting from the multiplication of, or excess of, compensatory damages ordered by a public authority are not insured by the law under which the policy is construed.
5. Any claim based on, resulting from or based on any patent or trade secret infringement.

List of companies providing professional indemnity insurance in India

1. New India Insurance: To provide professionals with financial security in the event of legal liability, New India Insurance offers a Professional Liability Insurance policy.  The same only applies to civil liability claims. If the policyholder makes a mistake or is negligent and this results in injury to a third party, their death, or third-party property damage, legal liability may result. There is an option to use group policies.
2. Reliance General Insurance Company: Reliance Professional Indemnity Insurance Plan is very well-liked because of its quick documentation and extensive coverage. Professional service providers’ or professionals’ services are covered for all legal fees related to disputes arising from those services. Reliance’s Professional Indemnity Insurance also permits a mid-term decrease and increase in the sum insured.
3. United India Insurance General Insurance Company: The United India Insurance Company provides professional indemnity insurance policies to individuals such as lawyers, certified public accountants, architects, engineers, and doctors, as well as to businesses such as clinics and hospitals. The insurance company’s policy has a 12-month term.
4. ICICI Lombard General Insurance Company: The ICICI, Lombard General Insurance Company’s professional indemnity insurance offers protection against a variety of “professional indemnity risks” to which a business or a professional may be exposed. There is additionally distinct coverage created specifically for medical professionals and facilities.
5. TATA AIG General Insurance Company: The professional indemnity insurance cover from TATA AIG offers protection from legal liabilities to professionals. A person can bring lawsuits for negligence, mistakes, or oversights made while providing professional services. Law firms, media outlets, consulting firms, financial institutions, IT firms, business process outsourcing firms, and other professionals are also eligible for the public liability insurance policy.
6. Bajaj Allianz General Insurance Company: Comprehensive protection against a variety of professional risks is provided by the indemnity insurance cover provided by Bajaj Allianz General Insurance Company. These policies are also available as group policies.

Conclusion

As long as the insurance policy’s limiting amount is not exceeded, indemnity insurance pays the policies’ beneficiaries for their actual economic losses. Usually, before receiving compensation, the insured must determine the amount of the loss. Even if the face amount of the policy is higher, the amount that can be recovered is only up to the amount of the loss that can be proven. Contrastingly, in the case of life insurance, the size of the beneficiary’s financial loss is unimportant. If the person whose life is insured dies for reasons not covered by the policy, the insurer is obligated to pay the beneficiary the full amount of the policy.

The majority of business interruption insurance policies include an Extended Period of Indemnity Endorsement, which extends coverage beyond the period needed to physically restore the property. This provision pays for additional costs that enable the business to prosper once more and aid in bringing revenues back to pre-loss levels.

Frequently Asked Questions (FAQs)

How much is the cost of professional liability insurance? 

Professional liability insurance premiums usually differ from one insurance provider to another. This is because personal indemnity cover is available to businesses across numerous sectors and industries, making it challenging to establish a fixed insurance rate. There cannot be cost parity because the policy is not universal for all types of businesses that avail themselves of the coverage.

Is professional indemnity insurance compulsory?

Professional indemnity insurance is not compulsory in India. Professionals, on the other hand, should consider getting this policy.

What is civil liability?

In the context of indemnity insurance, civil liability is the sum that a person is required to pay for potential damages as a result of a lawsuit.

References

1. https://www.investopedia.com/terms/i/indemnity_insurance.asp
2. https://www.latestlaws.com/articles/analysis-of-professional-indemnity-insurance-in-india/
3. https://www.turtlemint.com/general-insurance/articles/what-is-professional-liability-indemnity-insurance/
4. https://www.bankbazaar.com/miscellaneous-insurance/professional-liability-insurance.html
5. https://www.policybazaar.com/corporate-insurance/articles/what-is-professional-indemnity-insurance/ 
6. https://www.policybazaar.com/commercial-insurance/professional-indemnity-insurance/

---

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.