The amount of professional liability insurance a business needs depends on a range of factors such as its turnover, industry, previous claims history, and the value of the work being done for its clients.
Businesses working in certain professions may have a minimum limit of insurance for professional liability, according to trade or regulatory bodies’ requirements. For example, the Financial Conduct Authority (FCA) requires firms to hold minimum levels of continuous PII cover from the start of a firm’s authorisation to help prevent insolvency and excessive claims on the Financial Services Compensation Scheme (FSCS). A firm will need a limit of insurance sufficient to meet the trade or regulatory body minimum requirements in these cases.
In other cases, businesses might find that their partners or clients insist on a minimum PI insurance level before a contract is signed.
When deciding how much professional liability insurance you need, think about what could go wrong if you make a mistake and what kind of financial impact that would have on a client. Also, consider any trade bodies requirements in which you have a membership or regulatory bodies to which you must abide. There are other considerations to take into account as well, such as:
- What is the value of the work being done? (e.g., contract size and annual turnover)
- What are the odds of something going wrong?
- What impact could a mistake have on a client, and what does the potential compensation cost?
- How much would it cost to put right a mistake you’ve made?
- What legal fee limit do you want?
- How big are the contracts you are dealing with?
The larger the contracts, the bigger the risks and financial penalties a business could face if something goes wrong. This is why limits of insurance for chartered accountants are based in part on the fee income generated.
As you can tell, it can often be difficult for a business to assess how much PI insurance they need on their own. Specialist insurance brokers can help a business work its way through this analysis and make assessments to get professional liability insurance quotes for the right amount of cover. Because while it’s important to have enough cover, getting too much just means paying a higher premium than necessary.
The NimbleFins PI insurance guide looks at the requirements for a few different professions if you’re wondering how much professional indemnity insurance you need.
It is worth noting that you might still need PI insurance even after you retire or stop trading. This is because claims can be brought by a client years after work was done. A product called ‘run-off’ PI insurance is used in this case and covers professionals or businesses who are no longer completing new work. With run-off insurance, the level of cover may taper down over time as the risk of a claim decreases as time passes.
What is professional indemnity?
Professional indemnity insurance protects individuals and businesses if clients sue them to provide negligent advice or service given professional capacity or make mistakes. If a client suffers a financial loss due to sub-par professional service or advice, they can come after the professional for damages. In these cases, professional indemnity insurance can cover legal expenses and compensatory payments to clients. However, PI insurance won’t cover penalties or fines; for example, those brought by a regulatory body.
When do you need professional indemnity insurance?
Businesses or individuals paid for their professional advice or service can benefit from PI insurance. Think of accountants, architects, recruiters, marketers, consultants, contractors, builders, and more. If you advise or carry out work professionally, you probably need professional indemnity insurance. It’s not required by law, but it may be a requirement of trade bodies or your clients and business partners.
If you don’t have a suitable policy in place when work is carried out and continually until the time of a claim, you would have to pay for your legal expenses yourself, as well as any damages you’re found liable to pay the client.
Professional indemnity insurance cost
Professional indemnity insurance costs are extremely variable but can range from under £100 a year up to tens of thousands of pounds or more for a small business. The rate depends on the risk profile presented in an application. An insurer will consider your industry, your turnover, the potential impact of a mistake on a client, previous claims history, and many other factors when quoting cover for a business.
Since rates can vary significantly from one PI provider to the next, it’s important to shop around and compare prices. Failing to do so could mean you pay a much higher premium than is necessary. A broker can help in this regard, as they may have a sense of what a business typically needs to pay in your situation.