Professional indemnity insurance, one of the main forms of business insurance, aims to protect you and your business from various claims made by clients and third parties (whether those claims are genuine or false). In particular, it helps protect you when someone seeks compensation if you’ve made mistakes or are found to have been negligent. Professional indemnity insurance may also cover legal costs related to such a claim.
Professional indemnity insurance is often also known as professional liability or just “PI” insurance. The “professionals” covered used to be quite narrowly defined, essentially traditional “professions” like accountants, solicitors and architects. Now, however, the scope extends more widely to anyone offering specialist advice or services.
Purple Blanket Design is working on a new marketing campaign for one of their clients. Due to an oversight, they fail to put a contact address or telephone number on the advertisement that’s going in the national press. The client alleges that they’ve missed out on significant business (and therefore revenue) because of negligence by Purple Blanket, while still incurring the cost of the advertisements that haven’t brought in any new business. If Purple Blanket did not have professional liability insurance to cover them, they’d potentially face compensation costs as well as significant legal expenses.
What activities are covered by professional indemnity insurance?
You or your business may require PI insurance if you:
- Give professional advice
- Provide financial products
- Provide professional services
- Provide design services
- Handle confidential information
- Use copyrighted material or intellectual property belonging to others
- A client insists your business has it before they offer you work
In some instances professional indemnity insurance is compulsory when carrying out certain activities – for example, if you belong to certain professional bodies or are providing most financial services.
What does professional indemnity insurance cover?
A variety of businesses and professionals carrying out various services take out PI insurance to cover against:
- Failure to perform the service;
- Financial loss caused by negligence in providing advice or the service;
- Financial loss caused by the product or service;
- Financial loss caused by errors, omissions or negligent acts in providing the service or advice;
- Inaccurate advice;
- Disclosure of confidential information.
What is covered will depend on the exact policy and the detail of the policy wording (for example, many policies exclude the last item in the list above). Policies are often tailored to particular professions to take account of the specific types of claim that are likely to arise, but it’s still worth discussing your requirements in detail with a broker or directly with an insurer to ensure you’re adequately covered.
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Policies increasingly cover legal costs, but many still do not. Care needs to be taken where the limits on a claim can be used up in paying defence costs such that there is nothing left to pay the claimant. Check the policy terms to ensure the level of cover for both legal costs and compensation is sufficient for your needs.
The following are generally not covered in standard professional indemnity insurance policies but can often be added as extensions for an additional cost or can be covered by a different type of insurance policy:
- criminal prosecution;
- dishonesty of employers or directors;
- loss of documents;
- libel and defamation;
- copyright infringement;
- bodily injury arising from breach of professional duty
When is professional liability insurance cover active?
A mistake made may only be discovered years after the event, so it’s important that cover applies not only when the event occurs but also when a later claim is made. Very often, PI insurance policies only cover claims made during the policy period. Some PI insurance policies only cover claims made in the policy period for incidents which also occurred in the policy period.
This has a number of practical implications:
- When you first take out a professional indemnity insurance policy, the insurer will often exclude claims arising from any work you did before the start date of the policy (even if the claim is made during the policy period). If no insurance covers the earlier period, you may be able to extend the new policy to provide past cover.
- When you change insurers, you need to make sure claims arising now but arising from events in the previous period are covered. This might be provided via “run off” cover from the old insurer or obtaining agreement from the new insurer to cover new claims for old events.
- When you retire or end your business you may also need to arrange a form of “run off” cover for a period of time, to cover claims later arising for work done before the business ended.
Professional liability insurance can often assist even where a claim is yet to be made.
Avebury Architects have designed a building for their client and the project has since moved along apace. However, as part of looking at the plans again later Avebury realise that there’s an error with the design. Rather than waiting for a formal claim from the client or a third party, Avebury should be able to make a claim on their professional liability insurance to pay to rectify the problem directly at the point they’d identified it.
Is professional indemnity insurance compulsory?
Many professions need to have PI insurance as part of their respective industry body’s regulatory requirements. Many professional bodies check that you have professional indemnity insurance before allowing you to join them. In addition the providers of certain financial services are required by their regulator to have professional indemnity insurance in place. For example, cover is compulsory for:
- Financial advisers, investment arrangers, insurance, mortgage and home finance intermediaries and certain over financial services firms regulated by the Financial Conduct Authority;
- Solicitors in private practice;
- Accountants with a practising certificate (or accountancy firms in private practice) that are members of ICAEW, ICAS, ACCA or CIMA;
- Surveyors that are members of RICS; and
- Architects that are members of RIBA (Royal Institute of British Architects) or RIAS (Royal Institute of Architects in Scotland).
Who else may want PI insurance cover?
Even if you are not obliged to have PI insurance it may be sensible to have it to cover your business against any compensation claims. Without it, you might have to pay significant legal fees and compensation payments, as well as any lost income from the time spent defending the claim, if you make a mistake or something unexpected goes wrong. Aside from this potential financial benefit, there’s the peace of mind you’ll gain from knowing that your business is properly protected.
Having professional indemnity cover in place can also affect the way your business is perceived by potential clients. Many client will expect professional firms to have sufficient insurance in place and may choose to do business only with those that can demonstrate cover. If you fail to take out professional indemnity insurance, you could therefore miss out on new jobs and you may even choose to take out (or increase your existing cover) to meet the demands of certain customers. Businesses in the following areas may therefore want to take out professional indemnity insurance:
- Healthcare workers, including doctors, dentists, pharmacists, physician assistants and nurses
- Architectural service providers
- Accountancy, tax and legal advisers (where not members of the professional bodies detailed above)
- Management and business consultants
- Marketing consultants
- Training consultants
- Education consultants
- IT professionals including IT contractors, consultants, programmers and developers
- Professional tradespeople including plumbers, electricians and gas fitters
- Recruitment agencies and recruitment consultants
- Designers such as web designers, graphic designers and interior designers
- Fitness professionals including personal trainers, dance teachers and yoga instructors
- Teachers and tutors including private tutors.
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