Contractors Guide to Professional Indemnity Insurance

 

insurance policy with the words professional indemnity insuranceThere are many different professional indemnity products available for Contractors and Freelancers. So it's important to have some understanding how this insurance works to be able to make an informed decision about which policy is best for your business. 

Although cost is important, there are other factors to consider when buying a policy, to ensure it does what you expect when you make a claim.

Our guide to professional indemnity insurance for freelance contractors covers the following key points;

What is professional indemnity insurance?

Professional indemnity insurance (PI) will protect you against claims for losses or damages made against you by your clients or third parties as a result of negligent (or alleged negligent) services and advice provided by you - eg your mistakes and errors.

As today’s business environment is much more litigious than it used to be, even the most established businesses can find themselves in a reputation-damaging dispute with a client over a costly mistake.

A negligence claim can be made against you even when you don't accept you have been negligent. So as well as paying losses incurred by your clients, PI insurance also pays the legal costs of robustly defending you.

How much does professional indemnity insurance cost?

Annual premiums online can start from as low as £ 60.00 for an occupation considered low-risk and much more for higher risk businesses such as solicitors and financial services. Premiums vary significantly between occupations; for example a training consultant will pay a much lower premium than an architect as they are very different professional risks.

The premium is usually calculated as a percentage 'rate' of the annual business turnover which can range hugely from 0.1% to 10% of turnover depending on the usual risk factors shown below.

Insurance premium tax of 12% is also payable on insurance premiums, but VAT is not payable.

Where can I buy professional indemnity insurance?

Today, most freelance contractors purchase their insurance online. Once you enter our quotation system, the process takes just a few minutes and your documents are available immediately. Enter the quote system here.

If you are unable to obtain a quotation online because your risk information is not suitable for an auto-quote, leave your details in the fields when asked and we will call or email to obtain more information. We will then provide the most competitive quotation by email.

How is the premium calculated?

Professional indemnity premiums are calculated using a range of important risk factors which will typically include:

  • Claims history 
  • Occupation and type of work undertaken 
  • Number of partners / directors to staff ratios   
  • Fee income or turnover

Low risk occupations with small turnover can usually buy cover quickly and easily online. Higher risk and larger firms will be underwritten individually and will complete a proposal form which an Underwriter will consider in detail. They will also look at the firm’s website or they may even look deeper online into a firm’s background.

How much professional indemnity insurance cover do I need?

The amount of cover you purchase is called the 'limit of indemnity'. This is the monetary amount of cover provided under a professional indemnity insurance policy. It's the policyholders responsibility to decide an amount which is adequate for their business. Calculating the right limit of indemnity for a business isn’t always an exact science. Whether it's £ 50,000, £ 5 million or more, getting the level right is critical to avoid the disastrous consequences of under-insurance. For some further guidance on this subject please read our guide Your Limit of Indemnity - Getting it Right.

How big is the professional indemnity market?

There are no formal statistics about the size of the market and estimates vary between sources. We estimate that the UK professional indemnity insurance market in 2018 was worth around £ 2 billion in annual premiums.

The internet has now made this class of insurance very accessible and affordable. An estimated 500,000 small businesses / freelancers now purchase their PI insurance online, although buying this insurance online is NOT suitable for every business.

More complex professions and larger firms need to source and buy their PI insurance using the services of a specialist broker like ourselves.

What does it cover?

Here is a list of some of the risks which may be covered by a professional indemnity policy:

  • Negligent act, error or omission
  • Dishonesty and fraud
  • Accidental infringe on intellectual property
  • Loss of documents or data
  • Unintentional defamation (libel and slander)

Professional indemnity insurance will also pay the legal costs incurred in the defence and settlement of claims.

What is a Claims Made wording?

Professional indemnity cover is usually offered on a 'claims-made' basis. This means that your insurer will only cover you for claims that are brought against you DURING the term of your policy. If a claim is made against you after your policy has expired ­– even if the incident occurred while your policy was in place – you will not be covered for that claim.

For example, if an incident occurred in 2014 when you had professional indemnity cover, but the client brings a claim against you in 2015 – after your policy has expired – you will not be insured for that claim.  A policy must always be in force for a claim to be met by an insurer.  

Some examples of professional indemnity claims

Any profession or occupation providing a service or advice can make a costly mistake. Resulting negligence claims range in size from relatively small amounts, to high level litigation between major companies which can run to billions. We’ve selected just a few examples.

  • Software Designers found that there were deficiencies in the design of a software package for the client. The system failed to meet the clients requirements. Claim settlement £ 800,000
  • An IT Freelance Contractor failed to deliver an adequate standard of work. The client alleged substantial deficiencies in the computer system. Claim settlement £ 200,000
  • Graphic Designer used a text book drawing adapted to use as a logo for a client and was sued for breach of copyright. Claim settlement £ 4,000
  • Firm of Actuaries used incorrect tables for an annuity scheme which led to the client making over-payments. Claim settlement £ 1,300,000
  • Conference Organisers were negligent in the organisation of a conference which was a total failure and they were sued by their client. Claim settlement  £ 29,000
Who needs professional indemnity insurance?

Anyone who provides advice, designs or offers a professional service will need PI insurance cover. With growth in the freelance contractors market this means that there are now over 500 different occupations buying this insurance. A few examples are shown below.

  • Accountants
  • Solicitors
  • Designers
  • Management Consultants
  • Tech companies
  • Conference organisers
  • Copywriters and Writers
  • Translators & Interpreters
  • Engineers
  • Surveyors
  • Software engineers

Many professions such as solicitors, architects, accountants, financial advisers, surveyors are required to carry professional indemnity insurance as a regulatory requirement.

 

This guidance note is intended for information purposes only. It is not and does not purport to be legal advice or specific insurance advice. Whilst all care has been taken to ensure the accuracy of the guidance note it is not to be regarded as a substitute for specific advice. If you require specific advice, call us on 0345 251 4000. This guidance note shall not be reproduced in any form without our prior permission. © All copyright is owned by Professional Indemnity Insurance Brokers Ltd.