What is professional indemnity insurance?
Professional indemnity insurance can provide invaluable protection for businesses whose advice and services could cause clients to lose out financially if mistakes occur. Here’s what you need to know.
Professional indemnity insurance is a type of business insurance designed to protect you if a service you provide causes a client or customer to lose money. You can take out this type of insurance whether you’re running a large operation or simply looking for self-employed insurance.
Business insurance is a way to protect your company against financial risk if things go wrong.
Insurers invented professional indemnity insurance hundreds of years ago to protect professionals, such as accountants, lawyers and architects, from losing everything due to occasional flaws in their advice or designs.
Today, professional indemnity insurance can cover the costs of unintentional data breaches, such as when an employee mistakenly sends client data to the wrong email address.
Other examples of coverage include reprinting promotional materials due to a typo or the levelling and rebuilding of a building due to a flawed architectural design.
This insurance covers related legal fees and compensation payments in various situations by design. Therefore, having professional indemnity insurance in place could be very beneficial if you handle client data or provide advice, instructions, or designs.
What does professional indemnity insurance cover?
Professional indemnity insurance covers the compensation payments and legal fees you may have to pay if a client claims your business.
For the claim to be honoured, it must relate to an unintentional error – or, in other words, a situation you did not intentionally create.
However, as it can take some time for problems arising from the mistakes to become clear, some insurers allow you to buy professional indemnity insurance that covers work you have already done in addition to any future jobs.
This cover will begin from a predetermined ‘retroactive date’. You cannot claim for any incidents before this date.
Generally, you can make a claim on your professional indemnity insurance for:
Negligence: failing to act with the required standard of care
Errors and omissions: making a mistake or failing to include a crucial piece of information
Data protection and copyright breaches: unlawful gathering, use or sharing of sensitive data, or plagiarising another’s work
Breach of confidentiality – unapproved disclosure of sensitive, business-critical information to third parties (resulting in financial loss)
Defamation – making a false statement about a client that paints them in a negative light, meaning they lose business
Loss of documents – failing to safeguard important or sensitive documents entrusted to the policyholder’s care
What is not covered by professional indemnity insurance?
Professional indemnity insurance policies often exclude costs associated with any reputational damage the client suffers.
It’s also important to note that:
You need employer’s liability insurance to be able to claim back any costs relating to injuries sustained by employees at your business premises
You need public liability insurance to be able to claim back any costs relating to injuries sustained by a client visiting your business premises
Is professional indemnity insurance required by law?
Professional indemnity insurance isn’t a legal requirement. However, it is often required if you want to be a member of certain regulatory or professional bodies.
This applies to solicitors, accountants, architects, chartered surveyors, financial advisers, and some healthcare professionals.
As a self-employed professional or limited company director, you may find that some clients will only work with you if you have professional indemnity insurance.
Last but not least, a good professional indemnity policy helps provide both you and your clients with peace of mind and could prove to be a wise investment should you need to defend your business’s actions in a legal dispute.
How much professional indemnity insurance do I need?
You can take out professional indemnity insurance cover ranging from around £50,000 to £5 million.
If you need professional indemnity cover to belong to a professional organisation – or to work with a particular client – you may be required to take out a minimum amount of cover, say £1 million.
But beyond that, the amount of cover you choose to take out is up to you.
The level of coverage you require will depend on various factors, such as your business’s:
Type
Size
Length of operation
Average contract value
It may also help to ask yourself the following four questions:
What’s the biggest mistake your business could make?
Could such a mistake be easily remedied?
Who would lose out financially as a result – and to what extent?
Could you afford to pay legal defence fees without insurance?
Alternatively, you can ask an independent financial adviser to help you determine the correct level of professional indemnity insurance for your business.
What happens if I don’t have professional indemnity insurance?
If you do not have professional indemnity insurance, you will be responsible for paying the costs arising from any legal proceedings brought against your business due to accusations such as negligence.
Depending on the size of the claim, this could easily cause your business to fail.
Business insurance is a way to protect your company against financial risk if things go wrong.