Professional indemnity insurance – what does it cover?

Professional Indemnity Insurance (PI) covers situations where a client claims they were given unsatisfactory advice or service by a professional – and the client sues. Usually, it means the client has suffered a financial loss as a result of the negligent professional advice or service and sues to reclaim this loss.

PI insurance covers two primary costs: the cost to defend against a claim and any settlement that a defendant is required to pay if, in fact, they are found to be liable. Even frivolous lawsuits can result in a PI claim as a defendant still needs legal assistance to defend their case, even if they have done nothing wrong. And this can cost thousands of pounds or more, between solicitor bills and court fees.

This is why even the most careful, knowledgeable and experienced professionals should have professional indemnity insurance in place. You never know what type of client will walk across your threshold tomorrow.

In addition to covering negligence or breach of duty (e.g., giving bad advice or making a mistake), professional indemnity can also cover issues relating to intellectual property (e.g., trademark infringement), defamation, a computer virus, employees dishonesty, acts or omissions of service providers like subcontractors and loss of documents.

 

What is the meaning of professional indemnity insurance?   

Professional indemnity means insurance that protects professionals in case they unintentionally give negligent or poor advice or service to a client. It protects against any financial losses that a client may face as a result. For instance, if an architect advises that a client use a certain type of material and that material is found to be unsafe, then the client could sue for the costs to remedy the situation or even rebuild a structure if necessary.

Any professional who is paid for giving their professional opinion or delivering a professional service should consider buying PI cover. In fact, it is required for many professionals who are members of certain trade bodies.

 

What is the cost of professional indemnity insurance?

According to NimbleFins, professional indemnity insurance costs are highly variable, ranging from as little as £45 a year up to tens of thousands of pounds a year – even for a small business. A business’s turnover has an impact on the cost of their PI as does the industry they work in (and the specific types of work they do).

For example, a freelance software developer may only pay £100 or so for PI cover. But a construction company will probably need to pay many multiples of this figure because a building mistake can be very expensive indeed to fix. Insurers price in the potential risk of each application, so the more risk you are exposed to (as it relates to the potential impact of your professional advice) the higher your PI premium is likely to be.

The cost of PI premiums can also be affected by trends in the market – even if your business hasn’t changed. For instance, architect PI premiums have increased dramatically due to the issues with cladding. This has meant that there are now fewer insurers in the market looking to insure architects, and insurers want to be well compensated to take on the risk of an architect who may have recommended a dangerous material. With that in mind, be sure to check for any exclusions in your policy – if they are acceptable to you, they can save you money on your premium. But if you need cover for an exclusion then you wouldn’t want it to not be covered, even to save money.

 

How much professional indemnity cover do I need?   

How much professional indemnity insurance your business needs depends on a variety of factors. PI insurance is commonly available with limits between £50,000 and £5 million of cover.

Certain professionals will need to meet the PI requirements of the trade bodies of which they are a member. For instance, chartered accountants need to maintain certain minimum levels of PI cover the depend on their fee income as well as, to a lesser extent, the activities they carry out for the clients. Similarly, solicitors’ PI insurance is required for all practicing law firms by the profession’s regulatory bodies. In fact, many professionals must buy a minimum level of PI cover to meet the expectations of any trade body to which they belong.

If you’re a member of any professional trade body, be sure to check with them to find out if there are any minimum PI requirements you need to satisfy to maintain your membership.

If you are buying PI insurance but not doing so to meet the requirements of a trade body, you may feel uncertain about how much PI cover you need. In that case, it might be useful to contact an experienced specialist PI broker or another insurance provider. They talk to lots of clients and customers and may have a feel for how much others in your situation tend to take for protection. They can also talk you through how to make the decision, perhaps taking into account your annual turnover, largest client fees and the impact of your work on your clients’ financial situation. However, don’t expect them to tell you exactly how much you need, as this decision is ultimately up to you.