Answers to some common questions about professional indemnity insurance

Employers liability, building and contents, or business interruption protection are all types of insurance cover familiar to business owners. Professional indemnity (PI) insurance is often a mandatory requirement for many professionals, yet the importance of this cover is often misunderstood. This article will explore some of the common questions our clients have about PI insurance, explaining what it is and why you might need it.

What is professional indemnity insurance?

Suppose you're responsible for causing financial loss to your client because of errors or omissions in the advice or designs you have provided. In that case, a PI policy covers any legal costs and expenses involved in defending a claim and compensation payable.

Who needs professional indemnity insurance?

Some professionals must have PI cover in place to carry out their work as it's a condition of their regulatory bodies. Examples include accountants, architects, independent financial advisers (IFAS), solicitors, and surveyors. For other professionals, having PI may be part of a contractual obligation. Many choose this cover because of the protection and security it provides if their advice or service fails to meet a client's expectations. Having PI in place can also play a key role in securing new clients and reassuring existing ones.

Do I need professional indemnity insurance?

While you strive to deliver the best service to your clients, occasionally mistakes can 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 copyright.

What does professional indemnity insurance cover?

PI insurance coverage depends entirely on your policy, so you'll need to ensure it provides adequate cover for the professional services you provide and the risks you may face. For example, this could include:

  • civil liability (such as damages and costs) for breach of duty
  • legal fees and expenses in defending a claim
  • helplines to help you manage risks
  • relevant regulatory body requirements.

How much does professional indemnity insurance cost?

The cost of PI insurance will vary from business to business. The insurer will consider many factors, including:

  • the level and type of covers required
  • number of employees
  • annual turnover
  • risks associated with your industry
  • your activities (some might be higher risk than others).

Because of these variables, there is no average premium. Professionals such as insurance brokers, independent financial advisers (IFAs), solicitors and surveyors should expect to pay a higher premium for their PI insurance because insurers consider their business activities higher risk and more complex. However, premiums across the board have been rising since the PI insurance market began hardening in 2019, due to the frequency and extent of claims. The hard market has seen a number of providers exit the market, with those remaining increasing premiums and restricting cover.

What level of professional indemnity insurance do I need?

Because every business is different, it's impossible to say how much cover you will need to protect your business against the unique risks it faces. There isn't a one-size-fits-all approach, so working with a broker who has experience of arranging PI is advisable. If you work in a regulated profession, like accountancy, there will be minimum levels of cover specified by your professional organisation. For example, ACCA accountants with income up to £200,000 need a PI limit that is greater than 2.5 x their total income and 25 x the largest fee. Royal Institution of Chartered Surveyors (RICS) require their members to only use approved insurers and if your turnover is £200,001 and above then minimum cover that you will need is £1,000,000.

Often, specified levels of PI insurance cover and limits may be written into client contracts, so your PI insurance broker may ask you for this information. As a professional and expert in your field, you do your best to limit your liability. However, it’s very difficult to predict if and when a client will make a claim. In many cases, professionals will opt for higher limits for peace of mind and protection should a claim cost them more than anticipated.

What should I look for when choosing a professional indemnity insurance provider?

Many providers offer PI insurance, but it's important to carefully select a provider that can meet your business needs. Some key considerations to keep in mind when choosing a provider include:

  • Can the policy be tailored to suit your business?
    Some professions require specific protection or covers; you may avoid paying an additional premium for cover you don't need if the policy is tailored to your business.
  • Does the provider understand your business?
    It's wise to work with a broker with expertise and experience in PI insurance. It’s important your insurance broker is familiar with professional services and has an understanding of the complexity of the risks involved in your business activities. Working with a PI specialist will help ensure you have the right level of protection in place and you're only paying for the cover you need.
  • Is there an option to pay by monthly payments?
    Sometimes it can be possible to pay your premium in instalments. This is an excellent option for new businesses that are still wary of cash flow.
  • Does the provider have a good reputation?
    It's always advisable to do your research when choosing a PI provider. Using a broker with expertise in PI will help you 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 your insurer will only cover you for claims made when a policy is in place and has been in place continuously. It's essential to maintain cover because claims can arise years after work has been 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.
    Your liabilities don’t end when you retire or cease-trading, so run-off insurance is essential. Run-off insurance helps protect you against any future claims you may face after you've finished practising for an agreed amount of time. You might find that run-off insurance is a compulsory condition of your membership to regulatory bodies such as the Institute for Chartered Accountants in England and Wales (ICAEW).
  • Does the provider offer the cover you need?
    PI insurance covers can vary between civil, legal or negligence which makes a difference when it comes to paying out the claim. Policy limits can refer to the amount payable for a single claim or it could be an aggregate amount. Aggregate means that the total amount of financial cover provided is limited to the amount specified in the policy schedule, arising within the specified period of insurance. Some insurers would apply specific exclusions in the wording or as endorsements which are not easily spotted. Using a broker would help assure your policy is right for your business and adequately covers your business activities.

When is professional indemnity insurance required?

Let's take a look at professional indemnity insurance in action. Here’s an example of how PI insurance could respond when faced with a claim.
A freelance architect 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 ensure the project ran smoothly and without any errors, the project did run into difficulty.
Fortunately, she had taken out a professional indemnity policy. This gave her peace of mind knowing any compensation payments she was required to pay were covered, along with legal costs and associated expenses.

On further examination of the claim, it came to light that the issues experienced in the project weren't the sole responsibility and fault of the architect. She accepted some liability for the problems that arose. The case was resolved swiftly and for significantly less than the client had initially claimed.

If you would like to discuss PI insurance and your specific business requirements, contact our team of specialist PI insurance advisers by email or call 0330 1623 862.