Learn more about coverage for errors, mistakes and accusations.
Mistakes and oversights can happen whether you’re a consultant, contractor or service provider. When they do, the costs can be overwhelming. Understanding professional indemnity insurance coverage ensures you’re prepared to handle unexpected liabilities, keeping your business secure and financially stable.
We’ll explore what professional indemnity insurance covers and why it’s essential for protecting your hard-earned reputation and assets.
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Professional indemnity insurance can help protect your business when someone claims you caused them harm due to a business disagreement, whether that claim is valid or not. Examples of indemnity insurance include professional liability insurance or errors and omissions coverage (E&O insurance).
While many insurance policies protect your own assets (like your car or home), professional indemnity insurance helps safeguard your business from financial loss due to claims made by others against you. Lawsuits, property damage and professional mistakes can be devastating, potentially wiping out your hard-earned savings.
Professional indemnity insurance acts as a shield, helping protect your business from these risks. Transferring the financial burden to the insurer lets you focus on running your business without constant worry.
While “indemnity” sounds scary, it’s just a fancy word that means when one party agrees to pay for another party’s loss or damage. So, “indemnification” is an agreement to transfer risk.
Every liability insurance policy contains indemnity. You buy a policy and pay premiums, and in return, if you experience a covered event, insurance helps you with the costs.
While indemnity is in every liability insurance policy, it also exists outside of insurance — for instance, contracts. If you rent an event space for your wedding, the contract you sign likely includes some kind of indemnification — or an agreement you’ll pay for any damage or losses your guests cause. The venue is transferring risk (and its associated costs) to you: indemnity.
While often used interchangeably, indemnity and liability insurance are distinct concepts.
Say you’re an accountant hired to review and close out a client’s end-of-year books. You do a great job, but just as you’re turning to leave, you knock over an expensive vase, and it shatters on the floor. This accident wasn’t related to your skills or the services you were doing, so professional indemnity insurance wouldn’t cover the damages. That’s where liability coverage comes in.
General liability insurance — a type of liability insurance — can help cover you for risks such as a customer injury or damages to someone else’s property. Like professional indemnity insurance, it can help pay for court and legal fees.
It may seem like splitting hairs; after all, an on-the-job accident is an on-the-job accident. However, insurance companies separate these policies to ensure you get the coverage your business needs without paying for those you don’t.
Indemnity insurance helps cover a range of professional disagreements. Professional liability insurance is a crucial indemnity coverage for many small businesses.
It helps protect policyholders from claims arising from mistakes, errors, or negligence in your professional services. For instance, if a client accuses you of making a professional error or missing a deadline to prepare a report, that causes them to lose money, they may seek damages. Without professional indemnity insurance, you’ll pay the upfront expenses to defend yourself entirely out-of-pocket.
Another form of indemnity insurance many people have heard of is malpractice insurance. This coverage is common among doctors, surgeons and other healthcare professionals because it helps to protect them from claims that their treatment resulted in physical or mental harm to patients.
The thing you need to remember is this: Accusations against you don’t have to be true for you to need to defend yourself.
Indemnity insurance can help cover court costs and fees regardless of the outcome, and can help cover settlements should you be found at fault — up to your policy limit.
Since every small business is different, not everyone needs indemnity insurance. However, anyone providing services or advice in specialized areas can be held to the general standards of their profession, making them accountable for their actions.
Given the potential liabilities, certain professionals must have professional indemnity insurance as an additional form of liability insurance. These include:
Accidents happen, but that doesn’t mean they should derail your business. If someone ever accuses you of not doing your job correctly, indemnity insurance can help keep you and your business covered.
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Kim Mercado is a content editor at NEXT. She writes and edits content for small business owners, and enjoys helping entrepreneurs solve their business challenges and learn about insurance. Kim has contributed to Salesforce, Samsara and Google.
You can find Kim trying new recipes and cheering the 49ers.
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