Indemnity

Indemnity means protection against financial loss. In insurance and business contracts, indemnity is a promise that one party will compensate another for covered damages, claims, or legal costs.

For small business owners, indemnity is the core reason insurance exists: it helps keep a claim or lawsuit from becoming a business‑ending expense.

In insurance, indemnity refers to the insurer’s obligation to restore you—as closely as possible—to the financial position you were in before a covered loss occurred.

That compensation may come in different forms, depending on the policy:

• Paying legal defense costs
• Covering settlements or court judgments
• Reimbursing repair or replacement costs
• Paying for recovery expenses after a covered event

Insurance policies don't typically allow you to profit from a loss. Instead, indemnity is designed to make you financially whole within the limits of your coverage.

An indemnity is fulfilled by making a cash payment or by repairing or replacing the damaged property. The indemnity agreement or policy specifies the payment mode.

Different types of business insurance use indemnity in different ways. Here’s how it shows up in the policies most small businesses carry:

Professional liability—also known as professional indemnity insurance—covers claims that your services, advice, or work caused a client financial harm.

Indemnity under this policy typically includes:

• Attorney fees and court costs
• Settlements or judgments
• Claims related to mistakes, negligence, or missed deadlines

General liability insurance provides indemnity when a third party claims bodily injury, property damage, or advertising injury caused by your business.

This often includes:

• Medical expenses
• Legal defense costs
• Settlement or judgment payments

Cyber insurance indemnifies businesses after data breaches, cyberattacks, or other digital incidents.

Coverage may include:

• Legal defense and regulatory fines (where allowed)
• Customer notification costs
• Credit monitoring services
• Data restoration expenses

Commercial property insurance provides indemnity for physical assets such as buildings, equipment, and inventory.

Compensation may be based on:

• Repair or replacement costs
• Actual cash value (replacement cost minus depreciation)

No. While most business insurance policies are indemnity‑based, some types of insurance are different.

For example, life insurance pays a predetermined benefit rather than compensating for a specific financial loss. This is why life insurance isn't considered indemnity insurance.

Indemnity is also common in client, vendor, and service agreements.

A contractual indemnity clause requires one party to pay for losses or claims caused by their actions. Many small business owners agree to these clauses without realizing the financial exposure they create.

Why this matters:

• A contract may require you to indemnify a client even for large or unexpected losses
• Your insurance must align with your contractual obligations
• Some contracts require specific policy limits or coverage types

Before signing a contract with an indemnity or hold harmless agreement, make sure your insurance policies can support the risk you’re accepting.

You need an indemnity when a contract with another party subjects you to an unacceptable level of risk.

Most small businesses need indemnity coverage if they:

• Provide professional services or advice
• Interact with customers or clients in person
• Handle sensitive customer data
• Sign contracts that transfer liability to them

Even a single lawsuit or data breach can create costs far beyond what a small business can afford out of pocket.

Insureon helps small business owners get commercial insurance quotes with one easy online application. Start an application today to protect your business against legal liabilities.