So, what is prize indemnity insurance, exactly? Hosting reward based promotional contests and events can help you attract attention to your business or organization. However, promotional contests come with risks. One risk is you may not be able to award a promised or expected prize. Your inability to deliver may result from circumstances beyond your control, but you still may be liable for the prize and face lawsuits. Understanding what prize indemnity insurance is can save your organization and its reputation.
Understanding Prize Indemnity Insurance
Big prizes attract a lot of attention from customers or potential customers. Who doesn’t want to win a new car or a lot of money? In offering redemption of these prizes, you risk disappointing the winner, your reputation, business, or organization by not following through with awarding the prize. One also risks prize over-redemption from unexpected popularity or unforeseen loop holes that could be costly if legally beholden to fulfill the over-redemptions. Prize indemnity insurance provides financial protection to your business if you cannot provide the promised reward. The prize indemnity insurance you purchase covers the cost of the prize. The bonus of this insurance is it may also protect your businesses from financial losses if a winner sues you for not awarding the prize.
How Does Prize Indemnity Insurance Work?
What prize indemnity insurance is can make the difference between a business or organization being able to promote their cause or not. Businesses, especially nonprofits, may not have the funds to cover a prize immediately, so they buy insurance to cover the shortfall. For example, if a nonprofit offers a cash prize to anyone who can make a basketball shot from mid-court, they don’t expect someone to win. If someone makes a basket from mid-court, the nonprofit must pay out to keep its reputation and organization intact. In the rare event that a contestant wins — and the business doesn’t have the award — prize indemnity insurance will cover the shortfall.
Examples of Prize Indemnity Insurance
Prize indemnity insurance is often called hole-in-one insurance because making a hole-in-one in golf is a common contest format, however, this insurance applies to all kinds of situations. It can cover contests and events other than golf tournaments, such as NCAA basketball brackets, fantasy football leagues, and trivia. Other prize formats covered are:
Games of Chance
Dice and random number games are games of chance covered by game of chance probability insurance. These games are contests where participants roll dice or choose random numbers to match the exact combination predetermined by the organization. The odds of winning depend on the number of dice or numbers and the predetermined combination. Covering games of chance is essential incase participants question the fairness of the game and decide to take legal action.
Games of Skill
These activities are typically based on skill, such as dart throwing, archery, or other sports games. Hole-in-one insurance is one example we mentioned previously but game of skill insurance applies to all sorts of skill-based contests like half-court fan shots during basketball or hockey games. In essence, it is any competition or contest that relies on the actions of an individual opposed to chance.
What Doesn’t Prize Indemnity Insurance Cover?
Usually, you can customize insurance for prizes, with the insurance covering what you want to cover. However, insurance companies often have restrictions. For example, an organization might have a grand prize of an all-expense paid vacation and smaller secondary prizes. Prize indemnity insurance would cover the cost of the more expensive grand prize but not the smaller prizes.
Insurance companies may require event liability insurance where the organization insures the property where the event is held before they’ll issue you insurance for prizes. Event liability makes sure the equipment and site are covered for damages. Similar to event liability, athlete tournament insurance is necessary because this covers injuries to participants in sports-based games. Without these, an insurance company may not insure your company. The same may be true for organizations without event cancellation insurance. Weather or other disasters can cancel an event, disappointing participants and leading to lawsuits against your business.
An insurance company can deny a claim if the company finds that the winner has an unfair advantage. For example, you should restrict the contests to amateurs. Limiting a sports-based contest to people who have not played the sport professionally gives a level playing field for everyone. Your restrictions or the insurance company’s rules may require no warm-ups for contestants. Participants should get one shot at the contest to make the contest valid. Don’t let participants know ahead of the event, so they don’t have the advantage of practice.
While not fixing the outcome of the contest by choosing the participant beforehand should go without mention, some less honest organizations have cheated in this manner. Cheating by fixing an outcome is insurance fraud and is subject to criminal and civil penalties.
How Much Does Prize Indemnity Insurance Cost?
The cost of premiums varies by company restrictions, the prize amount, the probability of the prize win, and the restrictions from the sponsoring business or organization. Purchasing prize indemnity insurance is more expensive than regular insurance. Insurance companies are leery of new or one-time events because they lack historical data to price policies, increasing costs. Still, it is less expensive than paying for prizes or lawsuits from winners. Typical premiums are 3% to 15% of the prize value.
How To Purchase Indemnity Insurance
Contest and event organizers typically buy insurance through excess and surplus lines (E&S) insurance markets or surplus lines insurance. Excess and surplus insurance is insurance falling outside ordinary property and casualty insurance. Insurance companies use E&S insurance to cover risks such as new technologies or one-off events, such as contests. The insurer will work with you to determine the probability of winning the prize and create prize guidelines such as rules and restrictions.
If you are wondering if prize indemnity insurance is right for you, you should consider talking to a professional about how you can protect your organization. The benefits of prize indemnity insurance are protecting your organization’s financial well-being and reputation. At ESP, we offer prize indemnity, games of skill, games of chance, and hole-in-one insurance. Please contact us today at contact@espspecialty.com or telephone us at 877-670-2377.
