Professional Indemnity insurance
Professional liability insurance also called professional indemnity insurance but more commonly known as errors & omissions in the US, is a form of liability insurance which helps protect professional advice- and service-providing individuals and companies from bearing the full cost of defending against a negligence claim made by a client, and damages awarded in such a civil lawsuit.
The coverage focuses on alleged failure to perform on the part of, financial loss caused by, and error or omission in the service or product sold by the policyholder.
These are causes for legal action that would not be covered by a more general liability insurance policy that addresses more direct forms of harm.
Professional Indemnity insurance may take on different forms and names depending on the profession, especially medical and legal, and is sometimes required under contract by other businesses that are the beneficiaries of the advice or service.
Coverage sometimes provides for the defense costs, including when legal action turns out to be groundless.
Coverage does not include criminal prosecution, nor a wide range of potential liabilities under civil law that are not enumerated in the policy, but which may be subject to other forms of insurance.
Professional Indemnity insurance is required by law in some areas for certain kinds of professional practice.
What is professional indemnity insurance?
If you’re looking for cover, you may come across technical terms like: ‘indemnity’, ‘duty of care’, ‘claims made’, and ‘negligence’. But what if these terms mean absolutely nothing to you?
Let’s start with the basics. What exactly is professional indemnity insurance?
It’s all about negligence and protection. In simple terms, in business, your negligence can be thought of as a mistake you’ve made. Mistakes usually have some kind of fallout (for example, an unhappy client) and that’s where the protection-for-you bit comes in.
As a professional, if your client believes you’ve done something wrong like given them bad advice, not delivered what you said you would, or been careless with their confidential information, they’re at liberty to sue you for any losses they sustain because of the alleged failure.
If they do decide to use, it’s then that a professional indemnity insurance policy kicks in.
The legal costs of defending you and any damages awarded to your client are paid – up to the level of cover provided by your policy, of course. You get the problem resolved and, with any luck, get to keep your client too.
An important point to make is professional indemnity insurance is for genuine mistakes. Insurers tend to draw the line at paying claims caused by recklessness or promising something you can’t deliver.
You still have to act responsibly. Even if you have your own terms and conditions, it’s advised you still have professional indemnity insurance.
These days, customers are inclined to sue first and ask questions later – you don’t actually need to do anything wrong to find yourself at the sharp end of some enthusiastic finger-pointing.
And just some enthusiastic finger-pointing is enough by the way. You’ll need to defend yourself if it happens and that’s both expensive and time-consuming for you.
So, who needs professional indemnity insurance?
Who doesn’t is probably the easiest answer? Not too long ago, professional indemnity insurance was taken up only by those who were required to have it by their professional bodies (accountants, solicitors, and architects for example).
Things are a bit different nowadays and it’s not just those who have to have professional indemnity that recognizes its advantages. There’s a very good reason for that.
When problems arise, the knock-on effect of an increasingly litigious society means that disgruntled clients will often default to a sue-first-ask-questions-later approach to mediation.
And we’re all familiar with the odious maxim: ‘where there’s blame there’s a claim’. As a conscientious professional, it’s important to protect yourself from all that nonsense. So, with that in mind, what’s the answer?
Who does need professional indemnity insurance? If you consider yourself to be a professional, a specialist, an expert, or an authority in your field then the answer to this question is you.
A general rule of thumb is: if you offer advice, know-how, consultancy, design, or other specialist services to your clients then you need professional indemnity insurance.
Do I need professional indemnity insurance?
Many professions need to have professional indemnity insurance as part of their respective industry bodies ’ regulatory requirements.
Even if you are not obliged to have PI insurance, without it, you could be liable for thousands of pounds worth of legal fees and compensation payments – not to mention lost income from the time spent defending any allegation.
Friends, You are likely to need professional indemnity insurance if:
- You provide advice or professional services to your clients (including consulting or contracting)
- You provide designs to your clients (such as working as an architect or design engineer)
- Friends, You want to protect against allegations of mistakes or negligence in work you have undertaken for your client
- You work as a contractor, consultant, freelancer, or self-employed professional, and your client has requested you arrange professional indemnity insurance in order to undertake a contract
- Your industry association/regulatory body requires you to have it
Any business that provides professional services, work, or advice may need professional indemnity insurance. Professional service industries include:
Professions that might need professional indemnity insurance include (but are not limited to):
- Accounting firms
- Surveying consultants
- Legal services
- Financial services
- Architectural firms
- IT consultants
- Medical practitioners
- Investment firms
- Engineering firms
- Management companies
In addition to providing security, and preventing financial hardship or even bankruptcy, your company may not be permitted to operate without an indemnity policy. Some professional service organizations consider professional indemnity insurance a mark of an ethical company and require proof of ownership for membership.
How much does professional indemnity insurance cost?
The cost varies depending on a number of factors, including the amount of cover, but Markel Direct offer PI insurance cover from £8 a month (or £74 a year) for a wide range of professionals.
Still, confused by professional indemnity insurance? Call us on 0800 640 6600. We are professional indemnity experts and will be happy to help with any questions you might have.
In the US, The cost of professional indemnity insurance varies considerably depending on the risks of your business. For most service industries, the potential liabilities are low, so coverage is basic and can start at $20 per month.
For industries, like the medical and legal fields, where risks and potential liabilities are extremely high, a specialized indemnity is necessary and is much more costly: several hundred dollars a month or higher.
What Does Professional Indemnity Insurance Cover?
If a client alleges that improper work, services, or advice caused them harm, professional indemnity insurance will cover the legal defense costs and the amount owed to the client. The scenarios such policies cover are numerous, and include the following:
- Professional negligence: Giving incorrect advice or making a mistake
- Defamation or libel: Saying or supporting defamatory or libelous statements about a client
- Breach of confidence or confidentiality: Sharing sensitive information without permission
- Breach of copyright: Infringing on copyrights, trademarks, or intellectual property
- Lost or damaged documents: Losing or damaging documents in your care
- Lost goods or money: Losing goods or money in your care
- Employee cover: An employee committing a malicious act
Specialized insurance policies for high-risk industries will have more details about the specific scenarios that are covered.
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A Guide to Choosing PI and Understanding the Policy Terms
Professional Indemnity Insurance (PI) can be a complex area. Policy wordings can vary quite fundamentally from Insurer to Insurer.
Different professions have different needs and as a result specialist wordings exist for some industries such as IT, marketing, media, construction, surveying, architects, etc.
Some professional bodies require their members’ insurances to be written on an approved wording, Accountants and Solicitors PI being two examples.
Examples of the professional indemnity insurance terms that you are likely to encounter when considering this cover for your business include:
Professional Indemnity Insurance policies are written on a claims-made basis. This means that it is the insurance policy that is in place on the date a claim is made against you, rather than at the time you carried out the work, that would respond to a claim
As mentioned above as your professional indemnity insurance policy is written on a claims-made basis, it is your existing insurance company that is liable for claims made today for work carried out in the past.
The retroactive date noted on your policy fixes the date from which they are potentially liable. A claim made against you for work carried out prior to the retroactive date will not be covered.
Your PI policy will show a retroactive date of either:
- Inception – namely the date from which you first placed your insurance with them
- A specific date eg 01/01/2000 – this is usually the date that you took out your first professional indemnity insurance policy
- None – this usually applies if your business has been insured uninterrupted for many years.
Negligence or Civil Liability?
Some policies will only indemnify you in respect of a claim brought against you for a negligent act. Others are written on a much wider civil liability basis, which would cover you in respect of claims arising from:
- Breach of professional duty;
- Dishonesty of employees;
- Libel or slander;
- Unintentional breach of confidentiality;
- Unintentional infringement of intellectual property rights. (Some insurers restrict this to unintentional infringement of copyright only)
- Loss of or damage to documents.
The Limit of Indemnity
The limit of indemnity is the maximum that an insurance company will pay out. A classic example of when professional indemnity insurance terms can make it difficult to compare quotations, you will need to know whether the limit of indemnity applies “in the aggregate” or to “any one claim”.
- “in the aggregate” means that the limit of indemnity is the maximum your insurance company will pay during the entire period of insurance, regardless of how many claims you make. For example, if your limit of indemnity is £1,000,000 in the aggregate and during the period of insurance you are unfortunate enough to have three claims successfully made against your business each for £500,000, you will find yourself having to fund a £500,000 claim yourself
- “anyone claim” the limit of indemnity is the maximum your insurance company will pay for any one claim. In the example above as each claim is less than the £1,000,000 limit of indemnity, they will pay each claim in the full (less the policy excess see below)
The choice of the limit of indemnity for your business’ professional indemnity insurance is muddied further by the issue of defense costs, see below.
Including Defence Costs or Defence Costs in Addition
How your insurance company treats the issue of defence costs should be an important factor when assessing your limit of indemnity. Some insurance companies state that their limit of indemnity is £x, defence costs in addition. This means that the limit of indemnity applies to the awards element of a claim against you and that legal costs incurred will be paid by your insurance company in addition to the limit. Other insurers will include defence costs within the total limit of indemnity meaning that a low limit of indemnity could get quite quickly eaten up by legal costs
The treatment of the excess can vary from policy to policy too. Some Insurers apply it to the whole claim including the defence costs. Others only apply it to awards meaning that you do not need to fund the initial defence costs yourself.
Professional Indemnity Insurance can be a complicated form of Business Insurance. I hope this article has helped you to understand some of the terms and jargon that you are likely to encounter and will help you to interpret the differences in cover when comparing quotations.
If you have any questions at all regarding Professional Indemnity Insurance please do not hesitate to contact me or a member of the team at Cass-Stephens Insurances.
5 Things To Ask Yourself Before You Buy Professional Indemnity Insurance
Professional Indemnity Insurance is designed to protect you when a problem arises with any professional work you have done. In today’s litigation culture, this form of insurance is becoming increasingly relevant for a range of professions.
Are you thinking about Professional Indemnity Insurance? Before you buy, it pays to consider the crucial 5 questions:
1. What exactly is Professional Indemnity Insurance?
Professional Indemnity (PI) Insurance is designed to protect you in the case of professional error. In the course of your working life an instance may occur where, unfortunately, the professional skill you exhibit is deemed inadequate.
In this situation, a dissatisfied client may seek some form of compensation, resulting in financial implications for you and your business.
This is where PI Insurance comes in: it provides financial support for defense costs, withheld fees, and any compensation which may be awarded against you.
In simple terms, Professional Indemnity Insurance is financial protection against professional error.
2. Why do I require PI Insurance?
This type of insurance is typically relevant for professionals who regularly give advice to their customers, and/or who are responsible for customers’ data and other intellectual property.
It can loosely be regarded as a protection against non-physical but nonetheless detectable damages. PI Insurance can be voluntary, but it is mandatory for some professions, such as Architecture, Accountancy, and some IT Consultancy.
3. How does PI Insurance benefit me?
If you are at all liable to be challenged in the competency of your work, or there is scope for your services failing to meet the expectations of your client, then PI Insurance will certainly benefit you.
PI Insurance will provide you with financial support if you are accused of professional negligence, misuse of intellectual property, loss of data, dishonesty, and defamation incurred by your business.
Despite best intentions, no one is immune to mistakes or accusations of mistakes – PI Insurance tackles the consequences of these errors.
4. When does the cover come into action?
Most forms of PI Insurance work on a claims-made basis. This means that the insurance only covers the claims made during the policy period.
If an incident occurs whilst you hold the policy, but the claim is made after you have discontinued the insurance, then the claim will not be covered.
On the flip-side, if an incident occurred before the time of holding the policy, but the claim is made once you have the insurance, then you can be protected.
Each claim is treated individually – as the policyholder, you can usually select your own limit of indemnity.
5. Where are there exemptions and conditions?
To ensure the most comprehensive insurance, it is advisable to thoroughly research the policy options available. Many providers of PI Insurance offer industry-specific policies.
Requirements are different for each sector: for some, the cover is restricted to business carried out within the EU, for example. The policyholder will usually be required to pay an excess for each claim, and the amount varies according to policy.
Suitability of Professional Indemnity Insurance can be achieved by the varying levels of cover available. This suitability can be further tightened by bespoke policies which can be continually amended.
It is important to tailor Professional Indemnity Insurance to the requirements of your individual business.
The insurance is ultimately designed to protect you in the case of professional mistakes – choosing the right Professional Indemnity policy is the first step towards annulling these errors.
Professional indemnity insurance often referred to as professional liability insurance or PI insurance covers legal costs and expenses incurred in your defense, as well as any damages or costs that may be awarded, if you are alleged to have provided inadequate advice, services, or designs that cause your client to lose money.
A Professional Indemnity policy is of a ‘Claims Made Basis’ meaning that consideration needs to be given not only to the costs now, but also for your past activities. Inflation and other factors need to be considered, as a financial loss of $250,000 several years ago, is likely to be significantly higher now.
Professional Indemnity insurance is designed for professionals who provide advice or a service to their customers. It protects you against legal costs and claims for damages to third parties which may arise out of an act, omission or breach of professional duty in the course of your business.
Example of a claim.
A graphic designer was briefed by their client to provide price tags that would fit around the stem of Christmas trees. The tags would need to withstand exposure to the elements and stay fitted to the tree while it grew.
The tags did not survive the test of time; the ink ran, rendering them useless to the client. The client lost money due to this oversight and took legal action against the graphic designer for professional negligence.
The graphic designer’s professional indemnity insurance policy covered their legal costs and compensation payments to the client, a total cost of over £3,000.
The client didn’t pursue their claim for the full cost of the labels; if they had, the claim could have cost as much as £100,000.
Pros and Cons
Professional indemnity insurance offers various benefits to cover risks, including:
- Protection against lawsuits: In service industries, your clients use your work and advice to make many important decisions. If you make a mistake, the ramifications can be far-reaching and extremely costly. Professional indemnity insurance provides coverage to defend a lawsuit and cover any damages.
- Peace of mind: Professional indemnity insurance coverage allows your employees and clients to focus on their immediate matters because they know that the company is protected from the worst-case scenario.
- Service organization membership: Many potential clients only consider businesses that belong to certain service organizations, believing that membership ensures that a business is well-regarded within the wider community. Often, such organizations require proof of a professional indemnity insurance policy for membership.
Professional Indemnity Insurance