Professional Indemnity Insurance (PII) is designed to protect your business if a client makes a claim against you where it is alleged your work, professional advice or service has caused the client to suffer a loss, either financial, reputational or other.
In practice it can cover claims against negligence, breach of confidential information/data or poor advice, where the client loses money as a result (directly and indirectly). Most professional indemnity policies not only cover the compensation costs but the legal fees and other expenses associated with the claim.
Scope of Coverage
Professional indemnity insurance covers a vast range of instances and varies per insurer and policy. Most policies insure against claims which come under the following categories.
- Professional Negligence – For example, sports instructor should ask their clients whether they have any pre-existing injuries or health conditions. On an occasion the instructor fails to do so, and a client sustains an injury, they could be held liable for professional negligence.
- Unintentional Breach of Confidence – For example; If you’re writing an email including a client’s sensitive data, and accidentally copy in the wrong person, this can represent a breach of confidentially (dependent on the contract/agreement with the client).
- Copyright Infringement – For example, if you use an image owned by another person on your website without permission, the owner of the image may take you to court. PI insurance would typically cover this claim, paying for the compensation settlement as well as the legal fees.
- Loss of Data – For example; If you lose or damage confidential documents, such as client data being wiped from your system, you may face an expensive claim. In the age of data protection, you could also face serious fines from ICO for violating GDPR if you did so in the process above.
- Defamation – Defamation and libel refer to false statements which harm another party’s reputation. Accounts can be spoken or written. If your company is found liable for counts of defamation, the slandered party may make a claim against you. Most defamation claims come from competitors but may also come from clients.
Businesses that Need Professional Indemnity
All businesses should consider taking out professional indemnity insurance. It’s particularly important for any business that handles client data, provides a professional service, manages intellectual property or provides advice to clients.
Individuals or businesses in the following occupations/industries commonly have a higher risk profile for professional indemnity claims and should seriously consider taking out cover:
- Business and management consultants
- IT consultants
- Architects or engineering contractors
- Designers of any kind, including graphic and marketing designers or photography design engineers
- Teachers, tutors, instructors and trainers
- Accountants
- Surveyors
- Recruitment professionals
- Healthcare professionals (if you work for the NHS, you may have indemnity insurance already provided).
Still unsure whether you need PI cover? Professional indemnity insurance can cover you for more eventualities than you might expect. Below you can find hypothetical examples of professional indemnity claims against businesses in different sectors to give you a better idea of if PI cover is right for your business. Here are some examples in context to provide a better understanding:
- Management Consultant – A management consultant draws up a business plan for a client. The client expected to secure funding based on the business plan, but they’re unsuccessful and the consultant entered incorrect financial forecasts into the document. The client blames the management consultant and makes a claim against them. The case incurs a settlement of £25,000.
- IT Contractor – A client contracts an IT specialist to create a mobile app. The mobile app crashes and the client loses enormous amounts of revenue while the app is offline. The client claims against the specialist. The settlement covers the app repair costs as well as the lost revenue for the period the app was down. The compensation is over £30,000, but the IT contractor is also required to cover the client’s legal fees, racking the total costs up to £45,000.
- Engineering Contractor – A design engineer is contracted to complete some CAD (computer-aided design) work for a client. The engineer accidentally enters the wrong measurements in the system, which delays the client’s project. They file a claim against the engineer for the cost of rectifying the mistake.
- Personal Trainer – A personal trainers client sustains a serious injury during one a session. They allege that the trainer failed to explain how to do the exercise sufficiently, and didn’t ask them if they had any existing injuries (which they did). They submit a claim against the trainer to compensate them for their injury.
- Tutor – A tutee needed a specific grade to pass their exams and get into college. They fail the exams and file a claim against the tutor, alleging that they didn’t adequately prepare them for their assessment. The tutor is found liable and must provide a pay-out covering the tutees financial losses, including the cost of their tuition, the cost of resitting the exam and the cost of the new teaching.
- Graphic Designer – A client asks a graphic designer to design a brand logo. The designer accidentally uses another designer’s font without their express permission. The font counts as intellectual property (IP). Use of another’s IP means broken copyright law, leaving the client open to a lawsuit for using the logo, the client in this situation claims against the original designer when there sued, PI cover protects in this specific case.
- Accountant – After many discussions with their accountant, a client purchases a company. The acquisition turns out to be a lousy investment, costing the client thousands of pounds. The client makes a claim against the accountant, alleging that the accountant had given them poor advice and had failed to warn them of some fundamental, costly issues with the new company.
- Solicitor – A solicitor is helping a client with a court case. The solicitor fails to inform the client of an important deadline, which severely affects their case. The client sues for professional negligence. The settlement covers the cost of fixing the mistake, and the clients legal fees. Fortunately, the solicitors professional indemnity insurance policy covers the claim.
Assessing Policy Needs
Choosing a professional indemnity limit depends on your type of business, its activities and thus your risk profile. It can be hard to determine how much professional indemnity cover you need. To work it out, you first need to consider the worst-case scenario, in terms of how much compensation you’d have to pay, should a claim against you arise.
Most insurers offer different levels of cover depending on several factors. Cover usually varies from £50,000 to £50 million. The best way to figure out how much you need is by contacting insurers directly, their advisors will typically be able to help you figure out the right level of protection that your business needs.
Other factors to consider when choosing a limit include if a client requires you to have a certain amount of professional indemnity insurance or if a trade body requires you to have a certain amount for membership. Trade bodies it particular are another good source of information when it comes to knowing what your professional indemnity limit should be for a business of a certain size in a specific industry (they also hopefully won’t try to sell you insurance).
- How Long Should My Cover Last? – It’s advisable to get cover from when you start trading. Bear in mind that unlike car insurance or house insurance, professional indemnity cover typically works on a claims-made basis. Generally speaking, a claims-made policy means that any claim made against you is handled by the insurance you currently have in place, even if the event in question occurred three years ago when you had a different insurance provider. Usually, clients can make a retrospective claim long after the incident took place. In many cases a client has up to three years or more where they can make a claim against you. It is therefore crucial that you have insurance even after you cease trading.
- Can I Get Short-term Cover? – Most professional indemnity insurance policies last for 12 months. The reason for this is that your insurance must be active at the time the mistake occurred as well as the time it is brought to your insurer’s attention. This condition means that if you were to take out insurance for the duration of a single contract and your client made a claim against a mistake found in your finished work, several weeks after its completion, you would not be covered. Therefore, most insurers require you to have continuous cover between contracts, ensuring that you have cover for work you’ve already carried out.
Reviewing PII Policies (Pre-Purchase)
When you’re shopping around for the right professional indemnity cover for you, there are several things to bear in mind.
Cover Level and Maximum
The next thing to look out for is the level of indemnity offered. More often than not, more cover means a higher premium. So, if you’ve got a suspiciously good deal, be sure to check the maximum your insurer will pay. Consider the value of your contracts and projects, factor in the worst-case scenario and add some substantial legal fees to figure out how much coverage you need as the bare minimum.
Geography and jurisdiction limits
Watch out for any geographical or jurisdictional limits. These limits dictate where in the world you are covered, and under which laws your contracts must be made for your insurer to cover them. Limits offered are usually the UK, EU, worldwide excluding USA & Canada and worldwide, covering everywhere.
Retroactive cover
Many policies cover you retroactively, for work carried out before the start date of the policy. Make sure you look at the retroactive date in your cover, to find out the earliest date from which your work is covered.
For some insurers, retro comes as standard. Some insurance companies charge extra for retro cover, and some won’t offer it at all. Make sure you’re clear on what your insurance covers before you buy.
Subcontractors
You may hire extra contractors or freelancers to help you with a project. You need to make sure that their work is covered, too. Even if your contractor has their own cover, more often than not in a claim situation you will be pursued by the client for damages not the contractor.
Cover for subcontractors is a grey area when it comes to PI insurance. Some insurers will cover certain types of external help, but not others. Some insurers seemingly cover all kinds of outside help, and some include specific conditions.
You’ll need to clarify this aspect with your insurer before you buy a policy. Make sure their position is crystal clear – you don’t want to be liable for someone else’s mistakes, without the insurance to cover it.
Wording
Firstly, consider the wording of the policy. Every business faces different risks and expects different sorts of claims. For instance, accountants won’t face the same professional negligence claims as a surveyor. A policy that includes wording relevant to your business operations is a policy more likely to cover you. If a claim hits, having the right wording can be crucial to ensuring your covered.
Insurance policies are often dense. For an untrained reader, it can be challenging to determine exactly what cover is provided and under what circumstances. As a starting point for understanding policy wording you can find some typical terms found in a professional indemnity policy and their usual definitions below:
- Excess refers to the first amount of any claim that you are responsible for paying.
- Injury can refer to a bodily injury, mental injury, emotional distress, shock, illness, disease or death.
- Insured, you, your, yours refers to the named policyholder. This will usually be you or your company.
- Limit: the maximum amount the insurer will pay.
- Product refers to any goods or products sold, supplied, processed, installed, repaired, serviced, altered, treated or renovated by you (where you denotes the policyholder, as above), including their containers, packaging, labelling and instructions provided for the goods.
- Professional services refer to services performed by you, or on your behalf, of which you’ve informed your insurer, and which they deem acceptable for the purpose of the insurance. Professional services also cover advertising for your business.
Exact definitions will vary per insurer and, in some cases, per policy, so be sure to check with your insurer and consult a relevant professional regarding policy wording.
Final Thoughts and FAQs
We’re all human, and every one of us makes mistakes but in the professional sphere, these mistakes can be financially crippling to your or your business. A simple mistake can lead to professional indemnity claims resulting in substantial financial loss (the price of putting it right as well as legal fees). To make sure your mistakes are valuable lessons rather than bankrupting nightmares, it is well worth investing in some comprehensive professional indemnity insurance.
- Do I Need Cover if I Work from Home? – If you handle sensitive client data and provide designs, advice or another service, you should seriously consider arranging professional indemnity cover, even if you are freelance, self-employed, or work from home. If you are found liable for professional negligence, an accidental copyright breach or for releasing sensitive client data without permission, you could face a crippling compensation fee, even if you’re a sole trader. It’s likely worth investing in some professional indemnity cover to protect you against claims of this kind.
- Any One claim or Aggregate? – You also need to watch out for wording such as any one claim and/or aggregate. If the level of cover appears as any one claim, this means your insurer is typically willing to pay up to this amount per claim made. An aggregate limit commonly refers to the sum of all accumulated claims made in a particular policy period. Once this limit is exhausted, you are no longer covered. If you want your insurance to cover for more than one claim, you will usually need an any one claim limit, or more extensive aggregate cover in place.
