Professional indemnity insurance protects individuals and businesses paid for their advice or professional service against claims made by clients that the advice or service was poor or negligent.
Unhappy clients can sue professionals to provide poor service or be negligent in their advice, and professional indemnity insurance is needed to protect against these situations. It can even help in the case of unfounded claims. This article will explain a bit more about what professional indemnity insurance covers.
What is professional indemnity cover?
Professional indemnity (PI) insurance is a risk management tool used by professionals from independent contractors to large limited companies to protect against lawsuits brought by their clients who accuse them of professional negligence. If a client loses money due to following professionally-given advice, the client can sue the professional for compensation due to negligence. Or, if a client blames a loss on a professional delivering a sub-par service, then they can take legal action.
PI insurance covers both the cost of mounting a legal defence as well as any compensatory payments that a person or business is liable to pay if they’re found to be negligent. Even a frivolous claim needs to be defended, and legal costs can run into the thousands of pounds in the blink of an eye.
A business or self-employed person will want to consider buying professional indemnity cover if they are paid for giving clients advice or a professional service. It’s not legally required; however, professional indemnity insurance may be required for businesses registered with the Financial Conduct Authority as well as solicitors, accountants and professionals who are members of certain trade bodies.
But many other professions might also want cover, even if it’s not required of them. For example, business analysts, consultants, designers, engineers, marketing and design businesses, agencies, software developers and more. Even tradesmen might want PI insurance if they’re giving advice or involved in any decision-making in large projects.
PI insurance typically covers intellectual property claims and defamation, too, so professionals like writers and authors might also want PI cover. A policy might also include an element of cover in case a computer virus cause an issue for a client. However, a business might have cover for this already through a cyber insurance policy.
When buying a policy, professionals should be aware that PI insurance is usually written on a ‘claims-made’ basis. That means a policy only covers claims made while an insurance policy is active. To ensure policyholders are covered consistently over the years, if you switch insurers, then your new policy should have a ‘retroactive date’ that dates back to the first start date since you’ve had consistent cover. As a result, professionals should be sure not to have any gaps in coverage between the policy end date of one policy and their next policy’s start date.
And since liability claims can be made up to six years after the fact, a business that closes or no longer provides covered advice or services may want to buy run-off cover to protect against claims that arise in the years after the work was done. This also applies to self-employed people whose policy has covered if they retire or change careers – they might want run-off cover to protect against any claims that are made ex post facto.
How much does professional indemnity insurance cost the UK?
Professional indemnity insurance for a small to medium business in the UK can cost hundreds, thousands or even tens of thousands of pounds. Prices are unique to each business, largely depending on the industry in which the business operates, and the specific business activities carried out. For example, an architect might pay quite high premiums due to the expense of fixing a building mistake or paying damages resulting from an unsafe design that causes harm to someone.
This is a specialist market, and professional indemnity insurance underwriters often go to great lengths to properly assess the risk presented by a potential client. As a result, you may have to fill out quite a detailed proposal form before you can even get a quote.
Professional indemnity insurance claims can be very costly, indeed, so insurers must thoroughly understand the risk they are taking on by offering coverage. And as a result, if an insurer views your business as a potentially risky venture, you might be quite surprised at how much professional indemnity can cost.
Run-off professional indemnity insurance cover is typically cheaper and gets cheaper each year as time passes. Most claims are brought within a reasonable timeframe of work being done, and with no new work occurring, the risk to insurers drops considerably over time – which is good news as no one wants to pay more for insurance than they need to.