What is compensation insurance? | The bank rate
Compensation is an agreement between two parties in which one party is responsible for compensating the other for damage or loss that it may suffer. Indemnity insurance protects a policyholder against claims for compensation in exchange for monthly or annual premiums. If a professional or business causes damage or loss to a third party, an indemnity insurance policy can help cover the insured’s settlement and legal costs.
Indemnification clauses are present in insurance contracts and commercial contracts, but indemnity insurance is something separate. You need indemnity insurance if you have agreed to indemnify another party and want coverage for potential lawsuits that could arise from personal negligence. Here’s what you need to know about indemnity agreements and how you might decide whether or not to purchase indemnity insurance.
What is compensation insurance?
Compensation is the promise of one party to compensate another party for potential loss or damage. Compensation is the act of compensating another party after a loss has occurred. In an indemnity contract, the indemnified party is protected against all liability and the indemnified party keeps the indemnified person unharmed.
For example, if a doctor works for a hospital, he or she may be required to sign an indemnity agreement that protects the hospital from liability. The doctor compensates the hospital so that the hospital cannot be the target of any legal action brought as a result of the doctor’s actions. Therefore, the doctor may require malpractice insurance – which is a form of indemnity insurance – to protect against possible patient lawsuits.
How does compensation work with auto insurance?
When you purchase an auto insurance policy, you are the claimant and your insurance company is the claimant. Your insurance company agrees to indemnify you or another party for loss or damage in accordance with the terms and limits of the policy. Your automobile insurance contract makes it the responsibility of your insurance company to compensate you when you are involved in a covered accident. An auto insurance company can cover an insured in the following ways:
- Legal fees: If you have liability insurance, your insurance company could cover your legal costs in the event of a lawsuit brought by the injured party.
- Medical bills: Your liability insurance includes your insurance company paying for medical expenses incurred by the other driver and their passengers in an accident, up to your liability limits. If you have medical coverage, your insurance company will also cover your medical costs and those of your passengers.
- Repair of material damage: If you cause an accident that results in bodily injury, your insurance company will pay compensation to the other driver under your liability insurance. If you have collision coverage, you could also receive compensation for repairs to your vehicle.
Who should have indemnity insurance?
In terms of auto coverage, indemnity insurance from an auto insurance company is required in most states except New Hampshire and Virginia. However, outside of the liability levels required by the state, maintaining a comprehensive coverage policy can help avoid the financial burden of paying for vehicle damage out of pocket.
You may want to consider purchasing indemnity insurance if any of the following are true:
- You consult clients for advice (financial advisors, fitness professionals, private teachers, insurance agents, etc.)
- You consult with clients to provide designs or frameworks (project engineers, web developers, graphic designers, etc.)
- You belong to an industry association that requires indemnity insurance or another regulatory body requires it
- You are self-employed and a client asks you to take out liability insurance as part of your contract (writers, marketing consultants, etc.)
- It is possible that you will make mistakes in your profession that would lead to allegations of negligence (doctors, lawyers, etc.)
What is accidental death cover?
Accidental death coverage, also known as double indemnity insurance, is a rider often available for life insurance plans. It could also be a stand-alone policy that makes a payment to the beneficiaries of the policyholder if the owner dies or is maimed in an accident. Typically, policies provide this payment in addition to the death benefit. Accidental Death and Dismemberment (AD&D) coverage will not provide compensation if the insured dies of natural causes.
Frequently Asked Questions
What are the common types of liability insurance?
Other than a standard auto insurance policy, other common types of indemnity insurance include:
- Malpractice insurance, which protects doctors from lawsuits
- Errors and Omissions Insurance (E&O), which protects businesses and individuals from legal action arising from misrepresentation, negligence, inaccurate advice and errors and omissions in services
- Directors and officers insurance (D&O), which covers the personal property of directors and officers if another party sues them for their actions in running a business
Is professional liability insurance tax deductible?
Yes. Because the IRS considers a business’s insurance costs to be eligible for write-off, professional liability insurance is generally considered a business expense and can generally be deducted from the cost of your premiums on your tax return. Commercial auto insurance for business purposes can be viewed as a business expense, for example.
Is Liability Insurance Worth It?
If someone takes legal action against you, the settlement could potentially wipe out your assets. Drivers face multiple risks on the road, such as collisions resulting in serious injury or damage. Given this risk, indemnity insurance in the form of an auto insurance policy can be particularly beneficial in protecting your finances. Plus, if you work in an industry that makes you vulnerable to legal action, liability insurance is often worth it.