Limit of Indemnity - How Much is Enough?

limit of indemnity - how much is enough?The limit of indemnity 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 your business isn’t an exact science. Whether it's £ 50,000, £ 5 million or more, getting the limit right is critical to avoid the serious consequences of under-insurance. 
 
So how much is enough? Here are some points which should help lead you to an adequate level of cover for your business;
 
What's your risk?

You know your clients and you are in the best position to assess the risks to which you are exposed while working for them. When assessing these risks, consider them in the context of your worst case scenarios (catastrophes), not just the most common or likely things that can go wrong. Major claims are always unexpected and usually unforeseen and their size can catch people out. Being under-insured can destroy your business so it's important to spend some time discussing possible major claim scenarios at Board or Partner level. 

The claimants legal costs

The third party (claimant's) legal costs can double the amount of the PI claim against you. 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.

What are your regulatory requirements?

If you are a regulated business, 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.

Consider historic work

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.

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.

Expecting the unexpected

There’s no exact formula for calculating an accurate level of PI cover and 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 possible on insurance
  • They only buy the minimum 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
Minimum limit of indemnity

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 firm's 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)
How much does it cost?

The cost of increasing the level of cover reduces as the limit of indemnity increases, making it extremely good value. If you'd like 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. © 2019. All copyright is owned by Professional Indemnity Insurance Brokers Ltd.