The way I see it, if you are not granting immunity, and also creating the possibility of financial penalties, then you're creating an opportunity for arbitrage via pooling risk. I'm not horny for the "free market", but I think there have to be cogent reasons to ban such insurance, and I can't think of any.
It's not hard to imagine: Officer X does something bad through incompetence, Officer Y tells the truth about it, and then all the other officers take revenge on Y for "being a snitch" and "screwing our pensions."
Once that pattern is in place, it continues even when Officer X is committing crimes, not just making mistakes.
Otherwise we are just doing the same things and expecting different results.
Right now in many police abuse scenarios there is no system in place that is recognizable as a working ethical system, bringing policing into some ethical system, even if just financially self motivated is definitely an improvement over nothing.
We had a police officer run down a young lady in a crosswalk while responding to a non-critical call without running lights or sirens. The officer was eventually fired but only because body camera evidence from the vice president of the officers guild surfaced where he was mocking the victim.
Ended up costing seattle taxpayers $29m.
https://www.kiro7.com/news/local/family-student-killed-by-sp...
Heaven and earth had to be moved in order to get the officer off the force.