Does your business rely on providing a professional service or advice? If so, there’s always the chance of human error and this can leave you liable if something goes wrong. This is where professional indemnity insurance comes in.
What's in this guide?
- What is professional indemnity insurance?
- How much does professional indemnity insurance cost?
- What's covered (and what's not)
- Do I need professional indemnity insurance?
- Services that generally require professional indemnity insurance
- Features of professional indemnity to understand
- 3 tricky terms to be aware of
- How much cover do I need?
- Who is covered under a professional indemnity insurance policy?
- Professional indemnity vs public liability
- How do I compare professional indemnity insurance?
- How do I make a claim?
- Frequently asked questions
What is professional indemnity insurance?
Professional indemnity (also known as personal indemnity insurance, or PII) is designed to cover the potential costs of unforeseen mistakes for both self-employed workers and businesses across many different industries.
How much does professional indemnity insurance cost?
Professional indemnity insurance is not one-size-fits-all. The cost for cover can vary dramatically depending on the insured’s cover needs.
Key factors that will affect your quote
When negotiating a competitive premium, the following factors are taken into consideration:
- Number of staff employed by the company and annual turnover. Sole traders or companies with, say, 15 employees won’t require the same level of cover as large-scale organisations.
- Types of clients. Professionals that work on large-scale, multi-million pound projects will require a higher level of cover than smaller firms.
- Industry. Industries like construction carry higher risks and make more claims than other industries and this affects the premium that can be offered to clients.
- The specific business activities and risks. Even within the same industry, different businesses or independent contractors will have a specific niche or risk associated. A full assessment of your business activities is recommended to ensure the most appropriate cover.
- Policy inclusions and exclusions. Obviously more comprehensive protection packages with increased levels of cover will cost more than more basic policies.
Some additional factors you might not realise
- Previous claims history. If no claims have been made against a client then a lower premium can be arranged.
- The amount of excess you’re willing to pay in the event that a claim is made. A higher excess can enable you to pay a lower premium. This does mean more comes out of your pocket during claim time.
- The statutory requirements for each industry. Some industries require a minimum PI insurance coverage. The higher the cover you require, the more expensive your premium will be.
Should I just compare price?
Don’t just compare on price. Professionals should be on the look-out for insurers that:
- Understand their particular industry and manage policies of similar businesses
- Can produce evidence or reviews of favourable outcomes for clients when claims are made
- Are approved by the governing body and membership association of your industry
- Have clear policy guidelines regarding inclusions and exclusions and communicate them to you so you know exactly where you stand
- Take a personal approach and assess your business specifically to identify the proposed risks in order to assign adequate cover
It is important to get a number of quotes and talk to a variety of insurers before committing to any particular policy.
What’s covered (and what’s not)
Professional indemnity is designed to cover the policyholder for any third party damage that may be incurred if a client files a claim. Any ensuing compensation that may be required to be paid to the client from the individual or business is also covered.
Some policies will offer cover for claims from clients for financial loss, bodily harm or damage to property due to errors in the provision of the service. An example could be a medical professional providing incorrect advice and then having to cover the client’s subsequent medical expenses.
What is covered
- Damages and compensation costs against you
- Legal fees
- Court fees
- Public relations fees
- The cost of investigation
What is NOT covered
- Damages to property
- Accidental injury
- Damages from intentional acts
- Intentional damage
Do I need professional indemnity insurance?
Any time advice is provided to clients, you should consider professional indemnity insurance.
Despite your utmost care, mistakes and lack of judgement can happen in the workplace and will often lead to the professional’s client seeking compensation for damages. A professional can still be liable for losses even if the mistake was not a result of their own negligence. Even if the claim is illegitimate, you may still need to go through the legal process of defending yourself against it.
Professional indemnity insurance ensures your business can continue to operate despite having to cover legal costs.
Here are some situations where professional indemnity insurance could be applicable:
Typical scenarios for specific occupations
Some of the industries now prioritising professional indemnity insurance include financial advisers, lawyers, tradespeople, marriage celebrants, beauty therapists, engineers, personal trainers and graphic designers. Here are some real-life examples of professional indemnity insurance claims:
Are you employed or a contractor?
Most UK workers are covered under their employer’s liability cover. However, any worker carrying out any consulting or contracting work must ensure that they have adequate and appropriate professional indemnity insurance in place.
All professionals should take the time to review the current cover they have in place and assess whether it is worth them taking out additional cover to ensure they are protected from claims against errors or omissions they have made in the provision of their professional activities.
Services that generally require professional indemnity insurance
As mentioned previously, anyone who provides advice or a service to another in an established discipline is a potential candidate for professional indemnity insurance. Some typical professions that will usually require professional indemnity insurance include:
- IT professionals
- Architects and designers
- Finance and mortgage brokers
- Real estate agents
- Beauty, massage and physiotherapists
- Travel agents and tour operators
Features of professional indemnity to understand
There are some important policy features that you should understand when it comes to professional indemnity.
Professional indemnity is designed on what’s known as a “claims made” basis. This means the insurer you were with at the time a claim is made is responsible for handling the claim, as opposed to the insurer you had at the time of the event occurring (unless you are using the same insurer). Here’s a general idea of what it looks like.
|Claims made vs claims occurring||Policy type||Claims occurring||What’s this mean?|
|Claims made||Professional indemnity insurance||The day you become aware of a claim and give notice to the insurer.||If you switched insurers after the event occurred, but the claim is made under a new insurer, they must handle the claim.|
|Claims occurring||Public liability insurance||When the event that results in a loss occurs.||If you switch insurers after the event occurred, the old insurer is still responsible for handling the claim.|
This means that the insurer must work to settle the claim even if the event leading to the claim took place when the policyholder was insured under another policy. This ensures that workers that have changed employers are still covered for events that took place for service provided to previous clients.
Run off cover provides an extension of the policy cover after a policyholder has stopped trading, e.g. the business has been sold, foreclosure, a merger or the policyholder has retired.
How long should run off cover be taken out for?
This will vary between individuals and organisations. Government bodies can provide advice on an appropriate run off period based on the service provided. It is best to review the legislation on the profession to determine how long following the provision of the service that claims can be filed and legal proceedings commenced against a professional.
- Loss must be discovered by the insured during the period of insurance
- Insurer must be notified of loss within a specified period of time. This will be outlined in the policy disclosure statement
- Cover is not provided for losses that have occurred following the discovery by the insured of such conduct by the principal, director or employee or after the insured had reasonable grounds for suspicion of the act occurring
- Indirect or consequential loss is generally not covered. This may include liability to third parties, trading losses, investigation costs or damages of any kind
- Insured must be able to substantiate to the insurer any loss covered by this policy extension
- Each policy will have a sub-limit applied for liability payable to the insured in the event of a loss occurring
3 tricky terms to be aware of
- Unlimited retroactive date: The insurer will cover claims relating to acts, errors or omissions regardless of when they occurred.
- Specified retroactive date: The policy is restricted to cover claims that arise from acts, errors or omissions that occur after the date outlined in your policy documents.
Some insurance brands limit the retroactive date to the time your business first took out professional indemnity cover but, ideally, you will typically hope for the retroactive date to be not any later than the date your business began offering services to customers. If you change to a different professional indemnity insurer, in most cases the retroactive date in place will be carried forward by the new insurer so that past work you have performed is still covered.
- Costs inclusive: This includes defence costs in the maximum amount it will pay for a claim. So if your policy offers £3 million cover, costs inclusive, and if a claim is made against which requires you to pay a liability of £3 million to the claimant but also sees you incur legal defence costs of £300,000, your policy will only cover the £300,000 legal costs plus £2.7 million of liability. That leaves you with £300,000 left to cover out of your own pocket.
- Costs exclusive: Legal defence costs are covered in addition to the limit of indemnity, which means it could be a more desirable option for most businesses.
How much cover do I need?
Unfortunately there is no set answer for how much cover you should take out. Every business is different and there are different regulations in place for minimum cover required for certain professions. Some other factors to consider that will impact what you pay for cover include:
- Clause of contract. Most contracts will specify a minimum amount of cover that the worker must have in place to carry out the project.
- Type of project and value. This is the correlation between the value and size of the project being undertaken and the workers’ exposure to claims for professional negligence.
- Perceived exposures. This is the assessment of possible causes of loss, injury or damage that may lead to a claim being brought against you.
- Number of parties relying on advice. If the nature of the project means that advice will be passed onto more than one party, the worker may be liable for claims from other parties affected.
- Cost of defending a claim. Some policies will have an additional limit applied for the actual cost of defending a claim. Lengthy court cases can quickly run into the tens if not hundreds of thousands of pounds.
- Willingness to carry risk. This requires the worker to assess how much of the risk they are willing to carry themselves with a lower policy limit or by transferring the risk to other parties.
- Cover for previous claims. Professional indemnity insurance is of a “claims made basis”. This means that cover can apply for claims made against the worker for previous activities. With this in mind, it’s important to consider the potential value of claims in the future following inflation.
Determining an appropriate level of cover is no easy task. It’s worth taking the time to speak with a financial adviser to help you assess the risks you are exposed to and what protection packages may be suitable.
Professional indemnity vs public liability
|What’s covered||Professional indemnity||Public liability|
|Types of businesses it’s designed for||Any business that provides professional advice to its clients||Any business that works with clients in public spaces|
Can I get covered for both under one policy?
Yes, you can.
One of the main reasons that people often get confused between these different types of cover is because many policies will provide cover for public, product and professional liability under the single policy.
How will I know if I have combined cover?
This is usually outlined in the product cover features and exclusions though it can be difficult for applicants to know exactly what events they will be covered for. Many professional indemnity insurance policies will have exclusions in place for injury or damages to property and vice versa. As an example, a professional indemnity insurance policy may have the cover extension that provides cover for claims arising out of “manufacturing, loss or faulty workmanship”, though this may recognise personal injury or damage to property as a loss.
What are the risks of a combined policy?
The risk is that many policyholders may actually be significantly underinsured from particular losses by relying on one umbrella policy to provide adequate cover for public, product and professional liability. It is worth speaking to an insurance consultant to help them find and tailor a policy closer to their needs.
How do I compare professional indemnity insurance?
With so many different cover options available in the UK professional indemnity insurance market, it is crucial that any sole trader or business looking to take out cover takes the necessary steps to compare different options to ensure they are receiving adequate cover at the right price.
- Default cover features: It is critical that anyone looking to take out cover closely reviews the cover features listed in the product disclosure statement to know exactly what liability they will be covered for. Refer to this section for an overview of typical cover options.
- Policy extensions: Most policies will offer a number of additional cover options to applicants to ensure there is an adequate level of cover in place. Such extensions may include run off cover and fidelity insurance.
- Limit of liability: Each insurer will clearly state the maximum compensation that will be paid for each claim within the product disclosure statement.
- Policy exclusions: Each insurer will have its own set of exclusions for when a policy will not be paid. It is critical that these are reviewed closely when comparing policies to avoid any surprises in the event that a claim is made further down the track. It is not enough to just skim over these… the conditions for payment must be closely reviewed and understood.
- Entities covered under the policy: Each policy will list the parties that will be covered under the policy. It is critical that any business owners looking to take out cover for employees and other entities related to their business have a clear understanding of whom exactly is covered for the provision of professional services.
- Professional services provided in the past: It is vital to have a clear understanding of how your insurer deals with claims for work that you carried out with a previous employer or while covered under a previous policy. Many policies will not recognise claims that have been made outside of their retroactive date.
- Cooling off period: Each provider will offer a cooling off period whereby you will have the option to cancel your cover if you feel it does not meet your needs. This is generally about 21 days.
- Claim conditions: Insurance brands will have conditions in place for the payment of claims for different liability faced by the insured. Some key aspects of the insurer’s claims conditions to review include:
- Alteration to risk
- Changes to the policy
- Worldwide territorial/jurisdictional limits
How do I make a claim?
In the event that a claim is made against the insured, it is their duty to inform the insurer as soon as possible. Notice is to be put in writing and sent to the insurer by courier, fax or certified mail. The insurer will recognise that notice has been received once their underwriting division has received the notice. Every letter, demand, writ, summons and legal process received by the insured related to the claim must also be forwarded across to the insurer. Most insurance brands will have a claims form located on their website for the insured to complete. These will usually be comprised of the following sections:
- Details of the insured
- Policy details
- General information about the claimant or potential claimant
- Details of the insured’s retainer/contract
- Details of the claim or circumstance
- Details of the insured’s response
- List of relevant documents that have been attached to the claim form
- Insured’s declaration
Frequently asked questions
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