When we speak to businesses about their insurance policies, they may talk about employers liability, building and contents, or business interruption policies. But mention professional indemnity insurance and they may struggle to explain what it is or why they need it. That’s why we’ve answered some of the common questions that businesses ask about professional indemnity insurance to help provide some guidance on what it is and why you might need it; professional indemnity insurance explained.
What is professional indemnity insurance?
A professional indemnity (PI) policy provides cover for legal costs and expenses involved in defending a claim, as well as compensation payable, if you’re found to be responsible for causing financial loss to your client because of inadequate advice, services or designs you have provided.
Who needs professional indemnity insurance?
For some professions, PI cover must be in place in order to be able to carry out their work as it’s a compulsory condition of their regulatory bodies. Examples of such professions include accountants, architects, IFAs, insurance brokers, solicitors, and surveyors. Other professionals are required to have PI as part of a contractual obligation, whilst many choose this cover because of the protection and security it provides if their advice or service delivered fails to meet a client's expectations. Having PI in place can also play a key role in securing new clients as well as providing reassurance to existing ones.
In business, you strive to avoid making any mistakes, but occasionally they do happen. PI insurance protects you and your business if your client alleges a financial loss for:
- a breach of a professional duty of care or unintentional breach of contract
- unintentional breach of confidentiality and/or copyright
- loss of documents or data
What does professional indemnity insurance cover?
This depends entirely upon the policy, so you’ll need to ensure that it provides adequate cover for the professional service that your business provides and the risks that you may face. For example, this could include:
- civil liability (such as damages and costs) for breach of duty
- legal costs and expenses in defending a claim
- helplines to help you manage risks
- relevant regulatory body requirements
How much is professional indemnity insurance?
The cost of PI insurance will vary from business to business. The insurer will consider many factors including:
- the level of cover
- number of employees
- annual turnover
- risks associated with your industry
There is no average PI insurance cost.
What should I look for when choosing a professional indemnity insurance provider?
There are dozens of providers that offer PI insurance. But some of these will offer services better suited to your profession and the size of your business than others. Some key aspects to keep in mind when choosing a policy include:
- Can the policy be tailored to suit your needs?
If so, you may be able to avoid paying additional premium for cover you don’t need.
- Does the provider understand your business?
It’s wise to work with a broker that has expertise and experience in professional indemnity insurance, given how complex some of the risks involved are. Working with a PI specialist will help to ensure you have the right level of protection in place and that you are only paying for what you need and not for what you don’t.
- Is there an option to pay by monthly payments?
This is a great option for new businesses who are still wary of cash flow.
- Does the provider have a good reputation?
It never hurts to do your research. Using a broker with expertise in PI will help you to find a reputable insurance provider, giving you confidence that claims will be dealt with efficiently and paid out if necessary.
PI is usually offered on a “claims made basis”. This means that your insurer will only cover you for claims made when a policy is in place and has been in place continuously. It is important to maintain cover as claims can occur years after work is completed. Always keep track of insurance renewal dates and keep up to date with the terms of your policy to protect yourself against liability claims.
Run off insurance is also an important consideration for professionals and can be a compulsory condition of being a member of a professional body, such as the Institute for Chartered Accountants in England and Wales (ICAEW). Run off insurance helps to protect you against any future claims you my face after you’ve finished practising for an agreed amount of time.
A fictional example of how PI insurance could respond when faced with a claim:
A freelance website developer found herself facing a claim for allegedly delivering inadequate work that resulted in her client experiencing a significant financial loss.
While every effort was made to make sure the project ran smoothly and without any errors, the project did run into difficulty.
Fortunately, she had taken out a professional indemnity policy. That meant that compensation payments were covered and her legal costs and associated expenses were also insured.
On further examination of the claim, it came to light that that the issues experienced in the project weren’t the sole responsibility and fault of the website developer.
She accepted some liability for the problems that arose and the case was resolved quickly and for a significantly less sum of money than the client had demanded.