Explanation of Professional Indemnity Insurance

Professional indemnity insurance provides coverage for acts of negligence taken by a business or professional association. The word indemnity literally means "payment" from one party to another to compensate for a loss. It implies the individual paying has somehow caused loss to the payee, usually through negligence. Any business owner, even an independent contractor, should consider his or her exposures to negligence. In considering this exposure, they may realize professional indemnity insurance is a wise idea.

Key Terms and Definitions

To understand any insurance policy, it is necessary to understand the industry lingo.

  • The most important term in indemnity claims is "negligence." Negligence can be charged when any party does not act to correct a problem if negative consequences could have been foreseen by a reasonable individual. For example, failing to replace a broken stair in a staircase could be considered negligence. 
  • The premium paid to an insurance policy is the charge a policy holder pays on a term by term basis. This premium is given in exchange for a guarantee of payment in the case a claim does occur.
  • A deductible is the amount a policy holder agrees to pay, either on a claim or on a policy, before asking the insurance company to begin making payments.
  • The limit, either per occurrence or per policy, is the most an insurance company will agree to pay.

Professional Indemnity Insurance Example

With professional indemnity insurance, a business owner pays a premium in exchange for coverage of business negligence claims. For example, if you own a bike rental shop, you may rent out a bike that has a flat tire. The user of that bike is involved in an accident, and the user blames your negligence at having not fixed the flat tire for the accident. That individual wants to charge you for medical bills as a result of the accident. Your indemnity insurance is charged for the claim because you have paid your premiums.

Finding Professional Indemnity Insurance

Any business insurer will be able to connect you with professional indemnity insurance. Even if you have a home business, you may consider adding an indemnity line to your rental or home insurance policy. This will protect you personally from any lawsuit that occurs because of an action taken by or on behalf of your business. If you feel you have a substantial risk level for negligence claims, you may consider using a broker to find the best possible indemnity insurance at a good price.

Cost and Benefits of Professional Indemnity Insurance

The cost of insurance is somewhat subjective because it is directly correlated to your risk factors. Your risk factors include past claims, the nature of your business, and the degree to which you appear negligent or responsible. To maintain your insurance, you will have to pay a premium monthly, and this premium can go up if you have a claim. The key benefit to this type of insurance is evident when your business is sued for a large amount of money due to negligence. Your professional indemnity insurance may be the only thing protecting you from bankruptcy.

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