Mistakes happen in any job, but for some professions, mistakes can mean costly lawsuits. PI insurance can help pay for compensation costs and legal expenses so that your company doesn’t suffer.
For anyone looking to start a business, getting the right cover for your company should be a top priority. Professional indemnity (PI) is one of the most important types of business insurance available. This guide will cover everything you need to know about PI cover, including:
- What is profession indemnity insurance?
- What type of claims does it cover against?
- Do I need professional indemnity insurance?
- How much cover do I need?
- How much does it cost?
- What should I look for in a professional indemnity policy?
- How I choose a provider?
- Case study
- Final thoughts & FAQs
What is professional indemnity?
Professional indemnity insurance 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.
Is it required by law?
You are not legally obliged to have professional indemnity insurance. However, many regulatory bodies and trade unions do require it, which makes it compulsory for some professions. This is the case for many financial advisers, architects, accountants, and solicitors. Some clients will not work with you unless you have professional indemnity insurance, so be sure to check with potential clients before you accept work without it.
What type of claims does it cover against?
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.
Claims of professional negligence commonly refer to mistakes made by your company or employees, or cases where you should the company or employee should of done something, but didn’t.
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.
To further illustrate professional negligence, here’s another example; If an architect makes a mistake in the plans for a building, which later collapses, this mistake, too would typically come under 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).
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 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.
Do I need professional indemnity insurance?
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
- 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.
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.
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.
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.
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.
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.
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.
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.
A settlement of £182,000 resolved the claim. Fortunately, the accountant was able to use their professional indemnity insurance policy which covered the claim to pay the settlement and legal fees incurred.
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.
How much cover do I need?
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.
How much does it cost?
Professional indemnity insurance premiums depend on the size of your business, the nature of your business operations, and the level of cover you are after. If you opt for a higher excess (the fee you pay when making an insurance claim), you’re likely to pay less for your premium.
Professional indemnity insurance starts from as little as £7 a month but can be considerably much more for larger businesses and/or high-risk industries.
The best way to figure out how much your professional indemnity cover will cost is to get a quote for your business. Most insurers will provide you with a quote online, within a matter of minutes.
What should I look for in a professional indemnity policy?
When you’re shopping around for the right professional indemnity cover for you, there are several things to bear in mind.
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.
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.
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.
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.
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.
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.
If bodily injury could apply to claims against you, make sure you clarify whether this would be included in your policy.
Not all professional indemnity insurance policies include claims relating to bodily injury. Indeed, most policies don’t. It depends on your profession, and whether the claims arise directly from a lapse in your duty of care. For some occupations, professional negligence is unlikely to ever result in bodily injury.
How do I choose a provider?
Most insurers provide quotes through their online service. Some providers even offer a discount for policies purchased online. That said, it can be better to speak to an insurer on the phone to see if they can tailor your policy to your specific business needs. Many optional add-ons don’t appear on insurers’ websites, so consider calling your provider before you make a purchase. Largely speaking there are two options when looking for insurance, go directly to the insurer, use a comparison site or use a broker.
Use an insurance broker
An insurance broker can help you figure out the kinds of claims that could come up against you. They’ll be able to advise you on what level of cover to get, and what protection you need in your policy. Using a broker can be helpful, as they’ll have the necessary industry expertise and experience to best advise you on the sort of policy you need.
They’ll also usually have access to more competitive prices. Although you may have to pay an extra fee for their services, this can still work out cheaper as they can typically offer you lower rates than if you’d gone directly to an insurer.
Imagine you own an accountancy firm. A client uses your services, and upon your advice, purchases another company. This purchase turns out to be a poor investment, losing the company hundreds of thousands. The client files a claim against your firm, alleging that your accountant’s poor advice is responsible for the client’s financial loss. In this hypothetical example, the claim would be covered by your firm’s professional indemnity insurance, as it relates directly to a mistake made in the service you provide.
A postal worker comes onto your firm’s property to deliver the letter detailing the above claim. While she’s delivering the letter, however, the postal worker trips up the steps leading to your office. She sustains an injury and brings your firm to court over the incident. In this hypothetical example, the claim would come under your public liability insurance, as it’s unrelated to your firm’s professional activities, but you’re still found liable as you own the property (you should also consider business property insurance).
Final thoughts & 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 professional indemnity 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.
What is run-off insurance and do you need it?
Many insurers offer run-off insurance at a reduced premium. Businesses may purchase this cover after they’ve ceased trading, run-off insurance is designed to cover businesses for any claims against them from incidents that happened before they stopped trading, protecting you from legacy issues.
How long you need run-off insurance for depends on your business and its activities. It’s a good idea to check with any professional bodies or trade associations in your industry to see what they recommend. Many regulatory bodies require their members to maintain PI insurance for six years after they cease trading. Six years is often the time limit for a claim made against you by a client under breach of contract.
For run-off insurance your premium will tend to go down year on year, so it can be worth purchasing a 12-month policy and renewing it each year. This decrease in cost is because the risk of a claim made against a company’s historic liability decreases year on year.
What about professional indemnity for medical professionals?
Some of the largest settlements arising from claims against professional negligence come from allegations relating to mistakes made by medical professionals. Medical errors can have devastating impacts. As a healthcare professional, it’s therefore crucial that you have sufficient cover to protect your practice and ensure that patients get the compensation they need in the case of an incident.
Most medical professionals working for an NHS or HSC body will receive indemnity through a clinical negligence scheme. In England, the Clinical Negligence Scheme for Trusts (CNST) provides indemnity, administered by NHS Resolution. In Wales, Welsh Risk Pool Services provide indemnity. Medical professionals in Scotland receive protection from the Clinical Negligence and Other Risks Indemnity Scheme, and in Northern Island indemnity is provided by each HSC Trust.
While these bodies provide indemnity insurance, it is worth investigating what precisely the cover includes. If you are treating NHS patients privately, for example, you may not have full indemnity from your scheme.
If you carry out any private or independent medical work, you must take out sufficient indemnity insurance, even if the work is carried out on NHS premises. While GPs are covered for many activities, you need to check the extent of your cover. If you require additional indemnity, you will need to obtain membership with a Medical Defence Organisation (MDO) or another insurer. If you’re unsure what cover you need, you can find more information in this statement issued by the DHSC (Department of Health and Social Care).
What is the difference between professional indemnity cover and public liability cover?
Professional indemnity cover and public liability insurance cover similar types of claims. The difference is how these claims come about. While professional indemnity cover protects your business against claims made by a client for mistakes you make within your work, public liability insurance covers you against claims made by members of the public, that may be unrelated to the job you’re carrying out.
In other words, if damage or injury results from an accident on your property or theirs, owing to your equipment or staff in some way, you’ll need public liability insurance to provide coverage. If the damage, financial loss or injury occurs specifically to a client, due specifically to a mistake you’ve made within your work, or due to an error within the services you provide, then you’ll need professional indemnity insurance to cover the claim.
Public liability claims can arise from damage to property or injuries sustained by a member of the public on your business premises, on the property of a client, or in public. Say a delivery person slips up the stairs on the way into your office building, or a customer’s child trips over your toolbox while you’re at their home. Perhaps you accidentally drop some equipment off the scaffolding you’re working on, which injures a member of the public passing by. These cases would come under public liability, as they’re separate from the work you’re carrying out.
Professional indemnity covers you when you do something wrong, or fail to do something you are supposed to do, which causes a financial, reputational or other loss. In some cases, professional negligence can cause bodily injury, too. This can be the case for an architect who makes a mistake in the plans for a roof. Should the roof collapse and injure a person, this person could make a claim against the architect and demand compensation for their injury. In this case, the incident has come about due to a mistake on the part of the architect. Protection against this claim would, therefore, come under the architect’s professional indemnity insurance.