Indemnity describes a relatively broad legal concept that seeks to make injured or negatively affected parties whole again, in the context of being restored to their former state. In popular usage, indemnity is used to describe types of insurance that can be purchased by commercial and non-commercial customers, but exactly what is professional indemnity insurance and why is it so important?
Indemnity insurance covers all types of insurance that provides some form of reparation in the event of some kind of loss. Insurance policies usually provide compensation for the injured party, but in a legal sense indemnity actually seeks to fully restore a contract. It is perhaps better to describe indemnity in this context by way of example. Car insurance is a type of indemnity insurance that provides compensation for the insured and any third party who has suffered a prescribed loss under clearly defined conditions. If an insured motorist drives into a parked vehicle, for example, the insurance company will seek to right the wrong in the only way that the law can, by providing compensation for the injured party. In the context of restoring their contract, the driver who caused the accident can also claim compensation from their insurer.
In a business context, there are many different types of indemnity insurance. Public liability is essential for most firms (especially those dealing directly with the public), whilst employer’s liability cover is a legal requirement in the UK for any firm that employs at least one person. Professional indemnity insurance is also very important and it is often this type of policy that might be described loosely as indemnity insurance.
Professional indemnity insurance provides a type of protection for certain types of professional. Not all firms need professional indemnity cover, but many can benefit from its far-reaching protection. Solicitors, architects, accountants and other such professionals whose advice and expertise may be relied on by clients to their detriment should have professional indemnity insurance.
A solicitor may, for instance, misrepresent their client. An accountant might make a mistake when working out the books. An architect or structural engineer might miscalculate a critical aspect of a building. If a mistake is made by a professional and mistakes are perfectly normal, professional indemnity cover can provide help in the form of compensation.