Guide To The Limit Of Indemnity
The limit of indemnity is the amount of cover or protection provided under a professional indemnity policy. But how much is needed for your business?
Calculating the right amount of cover for your business isn’t an exact science. Getting the level right is important to avoid under-insurance, which can have disastrous consequences for the firm, its directors and staff.
Key Points To Consider
If it’s your decision how much cover you purchase for your business, it’s important to be aware of the main factors which should influence your decision.
Here are some points which we hope will help you to make an informed decision about the level of cover you need;
- OVER-INSURE Always consider your worst case scenarios when deciding the level of cover, not just the most common or likely problems. It's the unexpected claim that catches people out and being under-insured can destroy your business. It’s important, so spend some time discussing this at Board or Partner level or call us to discuss.
- THIRD PARTY LEGAL COSTS The third party (claimant’s) legal costs can double the amount of a PI claim. These legal costs will be a major part of the claim and you need to ensure that your level of cover not only factors in the client loss, but also factors-in a significant amount for their legal costs.
- REGULATORY REQUIREMENTS Check the mandatory insurance requirements of your Regulator to ensure you fully comply with the minimum level of cover they require you to carry. Either visit their website or call us for details.
- CLAIMS MADE INSURANCE This is ‘claims made’ insurance cover. It’s the level of cover purchased today which will apply to all of your historic work. So if you reduce your cover because a project or piece of work has been completed and you feel you no longer need that higher level of cover, bear in mind that it will be the lower level that now applies if a claim comes in NOT the level applicable when you carried out the work.
- CLAIM INFLATION Professional indemnity claims can take years to reach settlement. In some cases, for larger claims it can take up to ten years! But the level of the insurance cover is fixed at the limit purchased when the claim is first notified. Would that limit still be enough to cover the claim and costs at the time of settlement in ten years? You should factor in inflation.
- STATUTORY INTEREST PI claims usually include an amount for statutory interest on the loss, incurred over several years. This can significantly increase the amount of the claim eventually paid. Factor-in an amount for this part of a potential claim against you.
Expect The Unexpected
There’s no exact formula for calculating an accurate level of PI cover and unfortunately many professionals do not always appreciate or even imagine the scale of the worst case scenario risks to their business. In the event, they find themselves under-insured and the main reasons for this are;
- They want to spend the minimum on insurance
- They only buy the amount of cover required by their regulator
- They don’t believe a catastrophe scenario could ever happen
- They don’t always appreciate the full extent of the risks they face
Although most Institutes and Associations provide their member firms with specific requirements for the level of PI insurance cover they must carry, this is only a minimum requirement and cannot possibly take account of each firms individual risk. Based only on our experience, we recommend the following as a minimum guide;
- Sole Trader Insure for at least four times fee income (£ 250,000 minimum)
- Limited Company Insure for at least three times fee income (£ 500,000 minimum)
- Partnership Insure for at least four times fee income (£ 1 million minimum)
Increasing Your Cover Does Not Significantly Increase Your Premium
PI insurance rates are currently low and represent extremely good value. If you wish to discuss your level of insurance cover or require indications of the cost of increasing your cover please contact us.
This guidance note is intended for information purposes only. It is not and does not purport to be legal or accountancy 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. This guidance note shall not be reproduced in any form without our prior permission. © 2018. All copyright is owned by Professional Indemnity Insurance Brokers Ltd.