Professional indemnity insurance explained...
The origins of professional indemnity insurance (PI) go back to London in the 1700s.
At that time the established professions such as accountants, solicitors and architects traded with 'unlimited liability' as a guarantee of the quality of their work.
When they made a mistake (an 'error or omission'), they would pay any remedial compensation to their client from their own pockets, limited only by the value of their assets. As such, they could literally 'lose the shirt off their back' if their mistake was significant enough.
Professional indemnity insurance was created to provide much needed financial protection against the risks and personal losses to which professionals were heavily exposed.
Nowadays the increasing reliance of businesses on the contracted services provided by many occupations has vastly increased the scope of the term 'professional' and a professional is regarded as any person or their firm offering specialist advice or services. The risks are as significant as ever and mistakes can still lose a professional their business and their reputation without adequate professional indemnity insurance.
What is professional indemnity insurance?
To have professional indemnity insurance explained fully, it is first good to have a clear definition of what it is. Essentially, it is an insurance product designed for professional people and firms which covers them in the event of certain errors made during the course of their business. Policies cover such things as professional negligence, errors or omissions, breaches of professional duty or conduct and civil liabilities.
This type of insurance means that professional people can work without the fear that they may be sued by a client or a third party for problems that occur as a result of their professional activities. In short, it allows professionals to carry out their work with greater confidence and peace of mind.
How much does it cost?
The cost of cover will depend on the type of profession, work being undertaken, the claims history etc. For example, a Financial Adviser is regarded as high risk and will pay more than a lower risk Recruitment Consultant.
Rates for this insurance generally range from 0.25% up to 5% of fee income or annual turnover, depending on the usual risk factors and market competition. But rates can also be higher or lower than this.
Minimum premiums will also apply which will vary between insurers. The 'minimum premium' is the insurance companies starting point for insuring a risk and they can vary significantly between companies. For example, the minimum premium could be £ 100 or £ 1,000 depending on the insurance company.
How is a professional indemnity insurance premium calculated?
The premium calculation for a professional indemnity policy varies by profession, as some professions are much higher risk than others. Like a car insurance policy, there are many factors that go into the cost of the policy, not just the amount of cover or limit of indemnity required.
The size of a business, it's turnover and its professional activities is a crucial part of any calculation that is made, along with any claims that have already been made. The greater the exposure to a potential claim, the more cost will be involved in the purchase of any insurance.
What does a professional indemnity policy cover?
Quite simply, it covers the cost of mistakes made when providing professional services. In todays busy business world, anyone is at risk of making a mistake no matter how professional or diligent they may be. Some mistakes are minor with little or no financial cost or consequence, but others can be far more serious and not having adequate PI insurance cover can financially destroy a company, its directors or partners.
Depending on the policy purchased it will cover negligence, errors and omissions, breach of duty and civil liability – professional indemnity insurance should also cover the liabilities which are the result of negligence, such as business interruption and the significant legal costs incurred from being sued.
Some policies will also offer protection for business or financial loss caused by defamation, loss of paperwork, the dishonest conduct of employees and unintentional breach of confidence.
In addition, the insurance will often cover any potential infringement of intellectual property rights or copyright, something that is of great interest in the creative industries.
The importance of professional indemnity insurance
Having an insurance policy that covers a professional for their work is important because it allows them to offer services without having to build in the potential additional cost of any mistakes they might face in the future. Furthermore, a professional indemnity policy can also cover the legal costs and expenses that might be incurred as a result of a legal case being made against a professional for their mistake.
Without this insurance, professionals are exposed to a great deal more business risk and may need to put their prices up to account for such risk. But with this insurance they are protected against many undesirable business outcomes and can operate more competitively, as a result.
Is professional indemnity insurance a legal requirement?
It's not a legal requirement, but most professional institutes and associations require their members to have some form of professional indemnity insurance and regulate this through their rules and regulations. To not have the insurance is usually a serious disciplinary offence which can result in a firm being fined or closed down by their regulator.
In many unregulated services such as IT and Tech, professional indemnity insurance is not a regulatory requirement. Nonetheless, those professionals who are not obliged to have this type of insurance are still wise to carry it. Management, business and marketing consultants are usually not required to have professional indemnity, but frequently still have it to protect themselves from the potential liability of legal fees or compensation payments.
Many large companies and government department will also insist any service provider they work with must carry PI and will require evidence.
Other occupations that often take out cover against their professional services include IT professionals, recruitment consultants, graphic and interior designers, personal trainers, instructors, teachers and private tutors. However, the list is much more diverse and extensive than just these professions.
How does professional indemnity insurance work?
A professional indemnity insurance policy can be an individually assessed product that is designed in a bespoke manner or it can be an automated product purchased simply and quickly online. Ideally, the policy wording will be written in such a way that it meets all of the specific needs of the policyholder.
For example, unintentional breach of a written contract concerning the supply of equipment or software might be important to an IT professional, but much less of an issue for a quantity surveyor. Likewise, damage limitation cover is likely to be of much greater interest to professionals working in marketing roles than private tutors, say.
With the relevant business covered to the appropriate level, all that then needs to be considered is the excess that will be applied. Like other forms of insurance, this is the initial amount of a claim that is not covered. The greater the excess level, then the lower the policy premiums, generally speaking.
How much professional indemnity insurance will I need?
When any form of insurance is bought, whether it is for a business or for personal cover, it is important to carefully assess how much cover is required. This varies from business to business and when it comes to professional indemnity insurance, it can be tricky to gauge just how much cover will be adequate for the business' needs.
Often it comes down to assessing the amount of financial damage that could be caused by looking at a 'worst case scenario' ie what's the worst thing that could go wrong?
There is no single solution or policy that will suit every circumstance. When considering what level of professional indemnity insurance to buy, consider the potential financial power of your clients and how much resource they might have if they were to claim against you.
The other matter to weigh up is the likely cost of legal fees you might face without insurance, should you need to defend yourself. This varies from industry to industry, but bear in mind that costs tend to go up across the board for issues that are complex to resolve.
Please read our helpful guidance note on this subject Your Limit of Indemnity.
Who should have a professional indemnity insurance policy?
There are many professions which need to have up-to-date professional indemnity insurance policies in order to be allowed to practice by their professional bodies. These include solicitors, accountants, architects and financial advisers. Chartered surveyors and some healthcare experts are also required to carry PI insurance by their respective professional bodies.
Outside of these areas, there are many professionals who choose to protect themselves with professional indemnity insurance even though their trade organisations don't require it. These include advertising professionals, business consultants, designers and public relations professionals, amongst others. In short, anyone offering professional services should carry it.
When is professional indemnity insurance required?
Although professional indemnity insurance is not a statutory legal requirement in terms of law, certain professions are regulated by their respective professional bodies and they may require individuals or organisations to take out a professional indemnity policy. For professionals who need to comply with all of their organisation's regulations in order to legally practice, then taking out or renewing their professional indemnity insurance becomes a de facto legal requirement. Indeed, not having insurance may, in certain circumstances, make a legal case against a professional possible in its own right.
What are the Limits of Professional Indemnity Insurance?
Although policies vary, there are several limitations on the sort of thing that professional indemnity insurance will cover. These tend to include matters like employers' liability, vehicle insurance matters, products liability and insolvency or bankruptcy. Nevertheless, other sorts of insurance policy can be taken out for these examples, if wanted.
Professional indemnity insurance also rarely covers things like bodily injury, fines and penalties or financial losses due to war or pollution and radioactive contamination.
There is a financial limit that a policy will pay out in the event of a successful claim, this is called the Limit of Indemnity. Some professional bodies set a minimum threshold for this sum, such as solicitors, who must be covered for at least £ 2 million in the event of any single claim that is made against them.
What is a professional indemnity insurance certificate?
A professional indemnity insurance certificate is a summary document that an insurance company may provide a policyholder on request which shows that adequate insurance has been taken out, without disclosing the confidential policy document This might be needed to presented to a client or trade body as evidence that the organisation in question is fully compliant with the relevant professional regulations.
A professional indemnity insurance certificate can also be used to show to clients and potential customers to offer them peace of mind that, should they need to make a claim against the services offered down the line, adequate financial provision has been made to meet such a claim. Therefore a professional indemnity insurance certificate can be used to give a policyholder's clients peace of mind.
What is Run Off cover?
Professional indemnity insurance may be required even after a business ceases trading or is merged with another organisation. For professional people who move into another area of business or who simply retire, claims against them further down the line remain a very real possibility.
Therefore, so-called 'run off' cover is available which is designed to offer the same level of peace of mind for a professional person who is no longer offering services. Such indemnity policies are ideally purchased when a professional going concern ceases to trade, whatever the reason. This could be due to the closure of a limited company, for example, but also partnership dissolution is another common reason for taking out a run off policy.
In some cases several years worth of cover can be purchased in a single go, without the need to renew, under a single policy. For more information about run off insurance please read our Guide to Run Off Insurance.
How do I buy a professional indemnity insurance policy?
Professional indemnity policies tend to be sold by specialist brokers like us, who are experts in their chosen field. Since some professional bodies require certain stipulations with their members' indemnity policies to be met, such as the level of cover required, going to an insurer with expertise in their field can be invaluable. They will be able to understand all of your business needs and help you to ascertain potential areas of risk that you may not have identified yourself. In addition to individual insurance companies, professional indemnities can be purchased via brokers. For more information please read our free guide Why You Need A Specialist Insurance Broker.
Professional Indemnity Insurance Glossary of Terms
- Breach of duty - When a professional or company fails to meet a duty of care towards another.
- Breach of confidence – Revealing something without informed consent.
- Civil liability - The responsibility for paying potential damages following a lawsuit.
- Compensation – An enforced financial remedy for losses or injury incurred.
- Defamation – Libel or slander.
- Error - A mistake requiring legal remedy.
- Negligence – Professional conduct that does not meet the standards of behaviour established by law.
- Omission – Failing to perform an act that has been agreed to or inadvertently leaving a word, phrase or clause out of a written document.
Please read our more detailed Glossary Of Professional Indemnity Insurance Terms.
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