What is professional indemnity insurance?

Getting sued is a worry for all business owners. Depending on your activity, you could face legal action for giving the wrong advice, providing a substandard service or potentially defaming someone. 

Professional indemnity insurance protects businesses accused of causing financial or reputational loss by supplying poor service or advice. Policies cover the cost of compensation and legal fees, which could be very expensive otherwise

What does professional indemnity insurance cover?

Professional indemnity insurance generally covers for:

• Using someone’s likeness without their consent: If you  someone’s image in an advert or on your website without their permission.

• Breaking confidentiality: If you reveal  sensitive information about a client that was supposed to be confidential.

• Losing or accidentally damaging client documents: If you lose or damage documents while they’re in your, or an employee’s, care. 

• Defamation: If you create or encourage libel statements about your clients.

• Professional negligence: If you make a mistake, or give incorrect guidance.

• Copyright infringements

Who should consider professional indemnity insurance?

Some professions are more likely to face the type of legal claims professional indemnity insurance covers than others. Typical policyholders include: 

• Lawyers

• Financial consultants 

• Architects

• Accountants

• Healthcare professionals

• Chartered surveyors

• Journalists

• Landscape gardeners

• Motor mechanics

• Private tutors

• Personal trainers

How much professional indemnity insurance do I need?

How much coverage you need depends on a few things. These include your occupation, how many people work for you, your business income and where you’re based. For example, legal costs in London tend to be higher than those in Cornwall. Likewise, the chances of human error leading to a negligence claim increase with the number of people you employ. 

While your circumstances may prompt an insurer to recommend you get, say, £2 million of cover, this shouldn’t cost the earth. Policies suitable for sole traders or large business proprietors typically start from around £8 a month. 

When considering the level of cover you need, consider the possibility you may face a legal challenge from more than one client at a time. For example, you could face several negligence claims if your accountancy firm used an inaccurate tax calculation to establish various clients’ income tax liabilities. 

How do professional indemnity insurance policies work?

It’s important to think about how you want your insurance to work. You could opt for an ‘any one claim’ policy or an ‘aggregate’ policy. With an ‘any one claim’ policy, you can make as many claims as necessary providing none of them go over the upper limit. 

For example, if your annual policy provides £2 million of protection, you could make several claims during the year, each for up to £2 million. 

If you opt for an aggregate policy, on the other hand, your insurer is only likely to pay out up to the agreed limit. So, if your aggregate limit is £2 million and your claims amounted to £3 million, you’d need to find £1 million elsewhere.

‘Any one claim’ policies tend to cost more.  This is because they provide a higher level of cover, but it’s best to shop around as policy terms and conditions differ.

How much does professional indemnity insurance cost?

Professional indemnity policies typically last for a year, but it’s possible to get short-term cover that lasts for just a few weeks or months. 

Annual policies vary depending on the nature of your work, but usually cost from around £8 a month and provide £5–10 million in cover.

You can also get policies that protect you from claims brought against you after you have stopped trading. This is known as ‘run-off’ cover. This benefit can be useful if a client brings a claim against you for negligence sometime after you completed the work.

Is professional indemnity insurance a legal requirement?

There’s no legal requirement to have professional indemnity insurance, but certain trade bodies only admit businesses that have this form of cover. For example, the industry bodies for solicitors, architects, accountants, chartered surveyors and financial advisers all require their members to have professional indemnity insurance. In the case of solicitors, these professionals must have a minimum of £2–3 million in cover for any single claim. 

Also, some clients only do business with you if you have professional indemnity insurance. This means you could miss lucrative contracts without this relatively inexpensive cover.

What isn’t covered by professional indemnity insurance?

Professional indemnity insurance generally doesn’t cover:

• Criminal acts: this includes things  like fraud, breaching tax laws, or mismanaging pension schemes.

• Employee illness or injury: If an employee is injured at work or becomes ill as a result of the work they do for you.

• Personal liability: If someone is injured at your place of work or as a result of your work

• Parking fines and penalties: If you get hit with parking fines or other penalties imposed by an external authority, such as the police.

• Asbestos, mould, or pollution removal: If you get a bill to remove asbestos, mould or another form of pollution

What types of insurance should you consider alongside professional indemnity?

Depending on your operation, you may want to get:

• Employers’ liability insurance – a legal requirement if you have any staff. It covers work-related illness or injury to employees.

• Public Liability insurance – protects you against personal injury claims brought about by members of the public.

• Tool insurance – covers the cost of replacing work equipment if lost, stolen or damaged through fire or flood.

• Goods in transit insurance – protection for any items you are transporting for work purposes that belong to someone else.

• Van insurance – motor insurance for work vehicles.

• Business travel insurance – travel insurance if you’re going away for work purposes. It covers items such as work equipment and company money that standard travel insurance doesn’t.

• Commercial property insurance – buildings insurance for commercial properties. This option covers the cost of repairing or rebuilding your property after incidents such as fire, flood, riot or storm damage

This list includes the most common types of insurance business owners get, but there’s others you may want to consider.. For example, companies that rely on the internet, perhaps sending or receiving vital data and documents, may benefit from cyber insurance.  

Specialist insurance package policies also exist for specific trades and business types, like plumbing, constructions, and gyms.. Each one is tailored to the particular needs of business owners in these sectors. So if you’re interested in this type of package cover, speak to an insurer, broker or a relevant trade body.

What is the ‘retroactive date’ shown on some professional indemnity insurance policies?

This is the date from which you’d have uninterrupted professional indemnity insurance cover. Or, a date in the past when an insurer has agreed to cover you.

So, although cover often begins when you take out a policy, you can get protection for a specific period before you buy. The start of this period is known as the ‘retroactive date’. When you buy this type of cover the extra period is noted in your policy. 

In some cases, you won’t be able to apply for a retroactive date to be added to your policy. This is usually if you’re aware of a pending legal challenge that relates to an incident that happened during the period you want covered.