What is professional indemnity insurance and what does it cover?
Professional indemnity insurance is worth considering if you provide advice or other services to clients. We explain how it works and when you need it.
If you offer advice or professional services as part of your business, professional indemnity insurance can help protect you when things go wrong.
Business insurance is a way to protect your company against financial risk if things go wrong.
What is professional indemnity insurance?
Professional indemnity insurance (also known as PI insurance) is a type of business insurance that provides financial protection by covering legal costs and compensation claims if a client sues you for providing poor or negligent advice or services.
Do I need professional insurance coverage?
It’s compulsory for certain professions to have professional indemnity insurance, depending on the requirements of their professional bodies or regulators. This includes:
Accountants
Architects
Chartered surveyors
Financial advisers
Solicitors
However, even if it’s not a requirement for your work, professional indemnity insurance can still be worth having. The cost of defending a claim and paying compensation if a client decides to sue is likely to be substantial, and you could struggle to pay it without insurance.
You should consider PI insurance for any job where you provide advice, recommendations, instructions or designs, such as:
Public relations
Interior design
Consultancy
Why is professional indemnity insurance important?
Even when you perform your work to the highest standard, mistakes and disagreements can still occur. If you provide poor advice or act negligently, the financial loss or damage to a client could be significant.
For example, you might accidentally share confidential information or give incorrect legal advice, resulting in a client losing out financially. Depending on the claim, you could be liable for hundreds, thousands or even millions of pounds in damages. Without insurance to cover this, you would have to cover these costs yourself, which could potentially bankrupt your business.
You might also find yourself in a dispute with a client where you have to defend yourself in court. Even if you win, you could still have to pay solicitors' fees and court costs upfront, leaving you out of pocket until the court makes a decision.
Having professional indemnity insurance also offers reassurance to people and companies you work with. It ensures you can cover the cost of any claims if something goes wrong.
What does professional indemnity insurance cover?
Professional indemnity insurance covers legal and compensation costs if a client sues you for financial loss incurred as a result of a service or advice you supply. This includes:
Providing negligent or poor advice or services
Making mistakes when delivering your service
In these circumstances, professional indemnity insurance could cover the cost of hiring defence lawyers as well as any payout awarded by the court.
You can also extend your professional indemnity insurance by adding cover for:
Infringement of copyright or registered trademarks
Breach of confidentiality
Defamation
Loss of documents
Read more:
How much professional indemnity insurance do I need?
The amount of PI cover you need depends on the nature of your work, the type of clients you have and the size of the claims you could face. If you’re required to have it by your professional body, it usually specifies the minimum amount you need – for example, solicitors need a sum insured of at least £2 million.
A client you’re working with might also specify the minimum level of cover they want you to have as a condition of entering into a contract with you.
If you’re a sole trader, you may only need £250,000 in cover, but you could get up to £5 million or more. When deciding the amount you need, consider:
The cost of putting right the consequences of a mistake you make
The maximum compensation you may have to pay a client in a claim, including for loss of sales or earnings
The size of your clients
The value of the business you have with each client
How much does professional indemnity insurance cost?
The cost of your professional indemnity insurance depends on the amount of cover you need and any optional extras you add. It could cost tens, hundreds or even thousands of pounds a year.
You’re usually only covered for claims made against you while the policy is in place. This means that even if the incident occurred during the policy’s lifetime, you’re not covered if it has since expired, which could be the case if you have left the profession or retired.
You can take out a ‘run-off’ policy to avoid this situation. This type of policy covers you for claims made after your original policy has lapsed. You may also need a run-off policy if you change insurers – unless your new insurer agrees to cover you for previous incidents.
A client can bring a claim against you up to six years after the event, so you need to make sure you have run-off cover throughout this period.
Professional indemnity insurance is available to buy directly from an insurer or specialist insurance broker. They can search the whole market to find the best policy for your needs. You can find one through the British Insurance Brokers’ Association.
Read more: How much does business insurance cost?
What happens if I don’t have professional indemnity insurance?
You could face a range of problems if you don’t have professional indemnity insurance.
First, you can’t operate legally without it in some professions.
Second, you could face financial ruin. If a client suffers a substantial financial loss due to your negligence or mistake and decides to sue, you could be left facing catastrophic legal and compensation costs.
Third, you could miss out on business opportunities. Some clients only feel comfortable working with companies that have suitable professional indemnity cover and will automatically exclude any that don’t have it.
Business insurance is a way to protect your company against financial risk if things go wrong.