What is an indemnity health plan?
An indemnity health plan pays a set amount for a given service — a free for service approach — regardless of what medical provider the member uses or how much the provider bills. The insurance company pays a pre-determined percentage of the reasonable and customary charges for a given service, and the policyholder pays the rest.
Indemnity plans do not have provider networks, so patients can choose their own doctors and hospitals. The amount the plan will pay varies by service, but is defined by the plan and pre-determined (typically a certain percentage of the reasonable and customary charges for that procedure), regardless of how much the medical provider bills for the service. This leaves the insured on the hook for potentially large and possibly unexpected medical bills, depending on how much the provider charges for the service.
Providers can balance bill the patient for any billed amounts above what the insurance company pays, since the providers don't have contracts with the insurer requiring them to accept the insurer's "reasonable and customary" amounts as payment in full.
How common are indemnity health plans?
Indemnity plans primarily existed before the rise of HMOs, PPOs, and other managed care plans, and are quite rare today. In the employer-sponsored health insurance market, they account for just 1% of all enrollment in 2024.1 And all plans available in the health insurance Marketplace are managed care plans (HMO, PPO, EPO, or POS).
However, people can purchase fixed indemnity plans, which are a subset of indemnity plans, and use them to supplement a major medical plan obtained from an employer or in the individual market. Fixed indemnity plans are not regulated by the ACA, so they don't have to cover the essential health benefits or pre-existing conditions. They are not suitable to serve as a person's only coverage, and should only be thought of as a supplement to major medical coverage.
Special Considerations
Certain professionals are strongly advised to carry indemnity insurance. These professionals include those involved in financial and legal services, such as financial advisors, insurance agents, accountants, mortgage brokers, and attorneys. When dispensing financial or legal advice, these professionals are potentially liable for negligence or inadequate performance despite the intent of goodwill.
Frequently Asked Questions
Are all types of insurance based on indemnity?
While most insurance is based on the principle of indemnity, not every policy qualifies as an indemnity insurance policy. Life insurance is a common exception because the loss (a life) isn't financially measurable; the payout is a pre-agreed sum rather than one based on the actual value of the loss. For a policy to be considered indemnity insurance, the payment must be closely tied to the replacement cost, fair market value or reimbursable expenses. In other words, the payout must directly reflect the actual loss experienced by the policyholder or a third party.
Is an indemnity policy transferable?
Commercial indemnity insurance policies themselves aren't transferable. However, as the policyholder, you can transfer the benefit of indemnity to third parties who suffer a covered loss resulting from your business. These third parties don't own the policy or pay for it, but they're still protected through your contractual agreement with the insurance carrier. There are also cases where you may want to transfer risk to someone else. For example, if you hire a contractor, you might require them to indemnify you from their own business risks. This is often done by having them name you as an additional insured on their policy, which offers you protection while they work on your behalf. In this case, you're transferring risk, not the actual policy.
Who is covered by indemnity insurance?
Indemnity insurance covers business owners, contractors, freelancers and other professionals against third-party claims for losses or damages. If a claim is successful, and you're found liable for the loss, your insurance will cover the awarded compensation, as well as legal fees and related costs, up to your policy's limit. Without coverage, you'd be responsible for paying these expenses out of pocket.
What does professional indemnity not cover?
Professional indemnity policies generally exclude:
-Intentional wrongdoing or fraud
-Regulatory fines and penalties
-Physical injuries and property damage (these are covered by general liability insurance)
-Contractual disputes
-Employee disputes or internal HR issues