Professional indemnity insurance provides protection for individuals who run their own business and provide advice or services to clients. Should a mistake or flawed piece of advice lead to a negative effect on a client or customer, it is conceivable that they may seek compensation through litigation. Obtaining professional indemnity cover safeguards a business from these and similar claims resulting from negligence or error.
What Is Professional Indemnity Insurance?
Commonly referred to as PI insurance, professional indemnity coverage acts as a financial life preserver in the event you fail in your duties as a professional. Although many individuals have an indomitable faith in their skills and knowledge of a particular industry, even the most experienced professionals are susceptible to mistakes. Given that such an error can lead to substantial fines, legal fees, and compensatory payments, having professional indemnity insurance can be the difference between saving and losing your business as well as your financial future.
As a result, professional indemnity cover is a necessary component for any business involved in the dispensing of advice or knowledge. Damages can also be incurred from failure to provide a service by a specific date. Should a third party suffer damages or loss resulting from a consultation or a missed deadline, they may be entitled to file a negligence claim. Even if the claim is groundless, the implied damage to your reputation as well as the legal costs of defending yourself in court can severely impact a business. In many of these cases, the determining factor is whether you can demonstrate duty of care. Legally, professionals are obliged to provide reasonable skill and care as part of their services to a customer. Failure to exercise duty of care can make you culpable for damages done to a client. However, proving that such a subjective concept was utilised can be difficult in an increasingly litigious environment.
Professional indemnity insurance protects you from these circumstances in a number of ways. It will shield you from any mistakes or negligence that leads to a dispute with your client. Many insurers will work with you throughout the claims process to defend your claim all the way to the High Court. Even if you lose the case, both the legal fees and compensatory damages will be covered by the policy, subject to the level of protection your business is insured for. In addition, professional indemnity insurance can extend to the cost of correcting such a mistake, which can significantly decrease the size of the claim.
Professional Indemnity Basics Explained
Professional Indemnity cover is fundamentally different from general indemnity insurance. Most general indemnity policies will only protect clients against property damage and bodily, personal, or advertising injury. In other words, general indemnity typically applies to damages of a physical nature, whereas professional indemnity claims deal with damages stemming from verbal communication. For example, claims derived from negligence, poor advice, violation of trust, unfair dealing, misrepresentation, and lack of care all fall into the category of professional indemnity cover.
Is Professional Indemnity Insurance Compulsory?
Depending on your occupation, professional indemnity insurance may be a regulatory requirement. Professions such as solicitor, accountant, and insurance broker are just some of the jobs that are legally bound to have insurance protection in the event of a mistake.
The type of professional indemnity insurance can also effect the level of business you can attract. For example, some clients mandate that a professional obtain a minimum limit of indemnity cover before they will agree to a consultation. This is especially true of public sector organisations, many of whom demand a minimum of £5 million of professional indemnity cover from prospective consultants or contractors. Consequently, those who do not secure adequate indemnity insurance will miss out on potentially lucrative projects.
For other businesses, indemnity is used as a selling point for clients. Although some individuals have the impression that a large indemnity policy casts a business in a negative light, the opposite is true for most clients. Having indemnity insurance provides an added layer of security for customers, as it provides a mechanism for recouping their funds were an error to occur.
Coverage for Short Term Contracts
Generally, a professional indemnity insurance policy is on a claims made basis. This means that the policy must be in place in order for a client to make a claim. For this reason most businesses keep their policy in place throughout the year rather than establish a new policy for each short-term contract. This protects a business for the next contract as well as any future claims made by clients of the previous one.
For example, if a business were to end their policy at the conclusion of a contract and the client were to file a claim a month later, the business would not be protected by professional indemnity insurance, despite having coverage at the time the mistake occurred. The business must be insured at the time of the claim.
Most insurers offer the ability to backdate your professional indemnity insurance policy to cover previous consultations and advice, provided there are no impending claims from your clients. For example, if you provided advice to a client a month prior to applying for a policy, the policy could be backdated to include that work. If the client were to subsequently file a claim, you would be protected despite not having indemnity insurance at the time of the original consultation.
Ensure You Are Properly Covered
As professional indemnity insurance is handled on a claims-made basis, policies will only cover claims made while the policy is intact. In other words, if you end your policy once you shut down your business or retire, you will not be covered for claims made after you end your insurance, even if the damages were incurred prior to cancellation. As a result, you may want to enquire about extending the policy for a period after closing your business to ensure no future claims go uninsured.
The same issue applies to those who change insurers. As policies run on a claims made basis, you will either need to arrange for run-off cover from your old insurer or request retroactive cover from your new provider.
Keep Meticulous Records
It is important to remember that both your premium and your insurance coverage is based on the information you provide the insurer. The records you keep will paint a clearer picture for the insurer as to how best to serve your individual needs. As circumstances and demands are unique to every professional, this information can be vital to ensuring you receive comprehensive coverage and an honest evaluation of your risks. This is true not only for when you sign up for a policy but throughout the duration of the coverage. Subtle changes in the way you operate your business can greatly affect the level and breadth of your insurance needs.
Moreover, while it may be difficult to avoid claims that result from error or negligence, keeping yourself organised and having records of the advice or services you provided can minimise claims that are spurious in nature. Being able to analyse documents and accurately retrace a situation will help you manage clients and deal with complaints promptly before a claim is made. In the event a client does file a complaint, contact your insurer immediately to limit the damage. Many insurance providers have an expert claims team trained at resolving such situations with minimal harm to your business and your client relationships.
How Does Professional Indemnity Insurance Work?
Whether the damages are caused by a mistake or a spurious claim, the effect of a lawsuit on your reputation and business can be substantial without the proper insurance. Professional indemnity insurance offers protection against these circumstances in exchange for an agreed upon premium. The cost and type of coverage is determined by a combination of risk assessment and cover specific to your business.
The first task for determining the cost and type of insurance for your business is risk assessment. An insurance underwriter will weigh a number of factors regarding the potential for risk, typically utilising the following checklist:
- The nature and operating procedures of your business
- The industry or service of your business
- Annual business income
- The total amount of indemnity cover you are seeking
- The excess amount
- The risk profile of your business
Given that no two businesses are the same, insurance quotes can vary significantly from provider to provider. Some underwriters may assign higher values of risk to certain aspects of your business than others. Generally, both the excess and the premium will fluctuate depending on how much risk an insurer is assuming. As with any product, it is incumbent upon the consumer to shop around and find a policy that is both financially palatable and comprehensive in terms of cover.
What Professional Indemnity Insurance Covers
In addition to price fluctuation, each provider may also have differing levels of cover depending on your business. Generally, however, a standard policy will cover you for the following infractions:
- Damages resulting from negligence, omission, error
- Breach of contract
- Downloading of computer viruses to unwitting third parties
- Fraudulent or criminal acts performed by an employee
- Negligence wrought by consultants, contractors, or individuals working on your behalf
- Unintentional breach of confidentiality, including the use or deliverance of information, patents, and trade secrets
- Intellectual Property, such as infringement of copyright or passing proprietary data as your own
- Libel or slander
- Loss of documents or data
- Retroactive cover for services rendered from the beginning of the policy
Be sure to contact your insurer as promptly as possible when confronted with a claim. Often times an insurer can take steps to fix the problem before it exacerbates into a much larger claim. It is also crucial that you read the small print and understand precisely what a professional indemnity insurance provider will cover before agreeing to a policy. If you have any concerns about a specific situation, confirm with the insurer that you will be protected should a client file a claim.
What Professional Indemnity Insurance Does Not Cover
With any lawsuit, there is the unaccountable damage caused by loss of reputation and future business. Typically, professional indemnity insurance does not protect you or provide compensation for these losses. Depending on the provider, there may also be an excess of approximately £250 for each claim. Moreover, each insurer may have their own list of exemptions and exclusions. Before choosing a policy, verify you have gone over these three steps:
- Obtain a list of all exclusions on a policy and confirm both you and your clients are comfortable with each.
- Find out the level of cover your clients expect. For example, some companies will offer indemnity insurance ranging from £50,000 to £5 million, and it is important to choose a policy that will provide adequate protection without being superfluous.
- Confirm that the policy includes coverage for all legal costs and expenses.
Despite the fact that professional indemnity insurance protects against mistakes, negligence and similar incidents, it is important to bear in mind your responsibilities as a consumer. For instance, you must make an effort to disclose all information and material requested by an insurance provider. Failure to do so can result in the invalidation of your policy. Be aware of the terms and conditions applicable to your policy, and follow the exact procedures listed when making a claim. Some insurers require prompt notification in the event of a mishap that may lead to a claim. Lastly, as with any insurance product, you are required to take reasonable measures to attenuate the chance of any loss.
Who Needs Professional Indemnity Insurance?
Anyone involved in the sale and dispensary of advice, knowledge or skills are candidates for professional indemnity cover. Professions notable for utilising the service include financial advisor’s, accountants, insurance brokers, public relations consultants, marketers, mortgage intermediaries, designers, publicists, solicitors, and builders. Financial advisor’s and brokers are the most obvious example due to the nature of their position. Brokers must advise clients on where to put their investments in what may be a volatile market. Consequently, the opportunity for negligence or perceived malfeasance is common.
In addition to advice, anyone involved in the handling and analysing of confidential data should obtain professional indemnity insurance. Legal firms not only must provide advice to clients but are often entrusted with sensitive information with regard to a particular case. Professional indemnity cover protects the firm in the event of a leak. Other common occupations associated with indemnity insurance include:
- Estate Agents
- IT Consultants
For instance, if an architect were to make an error in the planning for a construction project, it could result in significant losses should the mistake not be discovered in time. If the building work is already under-way, the client will suffer damages not only for the demolition, rebuilding, and wasted materials involved in the project, but also for the loss of revenue caused by the delay in opening the building. As the architect would be solely liable for these costs, the amount can be staggering. Journalists, meanwhile, can be sued for libel or making incorrect statements in the press.
With the advent of social media, it is very easy for individuals to slander clients or misrepresent the company they work for. Even employees who regularly work with computers could accidentally release confidential information in the form of an email. In one such example, an email sent to the wrong address resulted in a £35,000 indemnity claim, for breach of confidentiality and various legal costs incurred by both parties.
Internet start-ups are another entity highly vulnerable to liability claims. Allegations regarding breach of confidentiality are quite common with online companies that keep an extensive database of various clients and users. Battles over copyright issues and trade secrets are another frequent source of litigation when many of these business involve themselves in partnerships and subcontracting work that can muddle proprietary ownership of software and programming code.
In order to protect themselves from such legal haranguing, many of these companies acquire high levels of professional indemnity insurance. In fact, many of the directors and officers associated with young internet companies are often themselves the target of personal claims. This can be a pernicious threat to a new company funded primarily by venture capitalists and shareholders.
Who Provides Professional Indemnity Insurance?
There are a plethora of insurance providers on the market today, which can at times be a paradox of too many choices. Making use of online comparison tools can help you whittle down the various insurers and find a deal suitable for your individual needs. Intrepid researchers can take advantage of helpful guides and customer feedback by delving into various consumer feedback forums.
You can also seek the consultation of an insurance broker before committing to an indemnity insurer. Members of the Association of British Insurers (ABI)and other specialists can assist you in your search. You can verify if a broker is a member of ABI by visiting their website.
Online Insurance Quotes
In recent years the number of professionals utilising online comparison tools has elevated dramatically. As with most online services, the primary selling point is speed and convenience. With traditional brokers and insurers, consumers must visit an office and proceed to fill out a deluge of paperwork simply to obtain a quote.
After filling out a single online form, internet comparison tools can scour hundreds of professional indemnity insurance providers in a matter of seconds, narrowing the choices down to those suitable to your needs. Many of these online sites have worked with insurers to allow consumers to purchase a policy directly after receiving their quote, without having to visit a separate webpage. With online comparison sites, you can do the following:
- Compare and contrast professional indemnity insurance quotes
- Find package deals for policies that cover both professional indemnity and public liability
- Purchase professional indemnity insurance as a stand alone policy
- Pair choices down to an indemnity coverage that fits your business
Most comparison sites offer a quick and simple online quote system for establishing professional indemnity insurance. Furthermore, many sites can aggregate your choice of professional indemnity insurance with other commonly used products such public liability insurance and other business related cover. For those looking for an introductory guide to various insurers, the following is a brief overview of companies providing professional indemnity insurance.
AA provides indemnity protection for professionals against damage claims resulting from the dispense of knowledge, skills, or advice to a client. The company offers the following three features as part of their standard policy:
- Retroactive Cover – Get professional indemnity insurance for past work and consultations
- Flexibility – Multiple levels of cover up to £1 million or more with referral
- AA specialists – The company provides customer support with professional indemnity specialists
AA policies will protect your business in the event of professional error, omissions, and negligence, covering both damages awarded to a third party as well as any legal fees associated with the claim. Quotes can be obtained online or through by telephoning 0800 294 0905.
Hiscox professional indemnity insurance offers protection for errors, legal defence, and reimburses you for any fees a client may refuse to pay. Indemnity limits are established on a one claim basis. In other words, each individual claim is ascribed its own limit of indemnity. For members of the ICA or ACCA, cover is provided in accordance with the criteria set forth by those professional bodies. This includes cover for negligence, dishonesty and all other damages not listed under the following exclusions:
- Excess – You will be responsible for a small contribution to each claim. The amount of the excess varies depending on the choice of cover and the assessment of the underwriter.
- Duty of Care – Hiscox excludes any contractual obligations that go beyond the legal duty of care.
- Non-ICA or ACCA Accountants – For accountants unaffiliated with these organisations, Hiscox will only cover work they have been informed of and agreed to insure.
- Existing Claims – Any claims or complaints that you should have reasonably been aware of prior to instituting the policy are excluded.
Hiscox offers automatic renewal and direct debit of continuous policies. Policies can be cancelled within 14 days of the initial sign up with all premiums refunded. Existing policies can be cancelled at any time with 30 days notice and premium payments up until the end date. Ultimately, the main advantage Hiscox offers is a specialized, stand alone indemnity insurance as opposed to other companies that offer PI as part of their general insurance policies.
Coulson Pritchard Associates
Coulson Pritchard Associates claims to be the leading professional indemnity source for freelance consultants in the UK. Their portfolio consists of Royal & Sun Alliance insurance policies specifically catered to cover over one hundred freelance professions, with prices starting at £165 per year. The policies are aimed particularly at those with a freelance business, a market that has expanded considerably over the last decade.
Professional indemnity policies can be applied for then downloaded directly from the company website. Products cover a range of issues from professional indemnity, public liability, employers’ liability, personal injury and illness, health and safety, legal fees, and IR35 expenses. Customer service operatives are available Monday to Friday from 8:30am to 6:00pm.
Regardless of the provider you choose, vetting them through an online comparison site allows you to quickly research how they compare to hundreds of competitors, allowing you to find the most suitable plan for your business. In fact, many of these sites are affiliated with various insurance and professional indemnity brokers from the around the world. In addition to the United Kingdom, there are services delivering quote and buy products in Gibraltar, Malta, Eastern Europe and dedicated websites for Guernsey, Jersey, and the Isle of Man.
As the occupational paradigm gradually shifts away from traditional office and manufacturing jobs to freelance positions and consultation work, the need for professional indemnity insurance has risen in parallel. Combined with the gradual increase of litigation in modern society, it becomes imperative for professionals who provide knowledge, skills, and advice to protect their business in the event a client files a claim. Having the right coverage can not only recoup monetary damages caused by an error, but also mitigate the effect by helping to fix the issue before the client seeks larger compensation.
However, it would be wrong to assume that professional indemnity insurance acts as a panacea for gross negligence or a licence to throw caution and documents to the wind. There are a variety of exclusions with any professional indemnity policy, and failure to follow the proper procedures when dealing with a claim can result in the voiding of your insurance. More importantly, even with financial protection from a lawsuit, your business must still endure the damage to your reputation incurred by the mistake. Ultimately, it behoves every professional to not only protect themselves from the worst case scenario, but take the precautionary measures to ensure it never happens.