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Professional indemnity insurance – A practical guide for start-ups and small businesses

July 11, 2013

Professional indemnity insurance is an insurance policy that will protect you from claims made by clients who are not satisfied with the work you have done for them.

If you are starting a new business, freelancing for the first time, or simply wondering whether you should take out a professional indemnity insurance policy, this concise guide will help explain how this type of insurance works and whether it’s relevant to you.

Should I get Professional Indemnity insurance?

In days gone by, only those working in the ‘professions’, such as, solicitors, accountants, architects and surveyors would take out professional indemnity cover.

However, the rapid growth in the service sector and the trend for companies to outsource certain skills has created a new legion of individuals providing professional services. These include IT consultants and contractors, business advisers and coaches, book-keepers, copywriters, designers and financial advisers.

Professional indemnity, or PI, insurance is mandatory for most of the regulated professions, including chartered accountants, solicitors and chartered surveyors.

While PI cover isn’t a legal requirement for others, such as IT contractors, clients will often insist there is a suitable policy in place before they will hire you.

If you are providing a professional service or advice of any kind, it’s a good idea to get professional indemnity insurance. A professional mistake can be very costly, and without cover in place it’s possible a claim could wipe out your business.

When you consider that having cover can be the difference between saving and losing your business if you do make a mistake, it doesn’t seem very expensive at all. Some would say that the peace of mind it provides makes it a very good investment.

What is Professional Indemnity insurance?

Professional indemnity insurance will protect you from potentially crippling claims by unhappy clients. There are a variety of potential danger areas, including:

  • Negligence – where you have been negligent, or where you have breached a duty of care to your client.
  • Loss of documents or data – where you have mislaid important paperwork or data belonging to a client.
  • Intellectual Property (IP) – where you have accidentally infringed copyright, trademarks, or other types of IP owned by other businesses or individuals.
  • Defamation – where you have created or used material about other organisations, that may cause offence.
  • Dishonesty – where someone from your business has stolen from a client.

Not all PI policies will cover you for every one of these possible scenarios. When you are researching policies and getting quotes it’s important you check exactly what each one covers.

What protection will a professional indemnity policy offer me?

PI cover will typically protect you in the following ways:

1. You will be covered in the event that you have made a mistake that leads to a client making a claim against you. Your insurer will take care of any legal representation you require.

Even if you lose your case, most policies will also cover the cost of any damages granted to a client. The amount of financial cover you qualify for will depend on the level of protection you opt for when taking out a policy.

2. A policy will also cover the costs of putting right any mistakes you have made.

3. Many professional indemnity policies will also protect you if you lose a client’s documents while they are in your possession.

Some policies even provide cover if an employee, but not a company director or partner, has stolen from a client.

How much cover do I need?

The amount of cover you need may be dictated by your client, or by industry requirements. If neither of these stipulations apply to you, then you will need to ask yourself the following questions;

  • What are the value of the contracts or projects you are engaged in, and how big are the clients you are working for?
  • If you make a mistake, how much damage could it cause, and how much compensation would a client try to claim against you?
  • How much would it cost you in legal fees to defend the case?
  • What is the worst case scenario, and would your business be able to survive such a claim?

Most policies enable you to select a level of cover that’s suitable for you. The lowest level of cover usually available is £50,000, while policies of £5 million are commonplace for larger firms. Of course, the higher the level of cover, the larger the premium.

Should I take out retroactive PI cover?

When you are taking out professional indemnity insurance you will be asked whether you want to include ‘retroactive cover’. This is an option to include work that you have already done within the policy.

If you have been in business for a while but didn’t have a professional indemnity policy in place, it’s a good idea to include retroactive cover.

Some insurers will place a retroactive date in the policy wording. Work done before this date will not be covered, so be sure you check the policy. If no retroactive date is specified, all the work you have done since you started the business will be covered.

What to look out for when choosing a professional indemnity insurance policy

A quick online search will highlight dozens of insurers that offer PI insurance. With such an array of providers to choose from it can be difficult to know where to start.

Some aspects for you to bear in mind include:

  • Can the policy be tailored to suit your specific needs? If it can be, you will avoid having to pay the premium for cover you don’t need.
  • Can you get a quote and buy online with immediate cover?
  • What is the excess?
  • Is there an option to pay by monthly payments instead of an upfront lump sum? This is especially useful for start-up businesses.
  • Does the insurer have a good reputation?
  • Do you feel the company will deal with a claim efficiently and pay out if needed?

Getting quotes

It’s always a good idea to get several quotes. These days, most insurance websites allow you to get a quote by filling in a relatively short online form, so it doesn’t take much time to get a few.

You can get, an instant online PI quote from our partner, Hiscox insurance and can easily find a wide selection of others by searching the web.

Make sure you compare like for like

When comparing quotes, make sure you are comparing like for like. One point to look out for is whether the cover is offered on an, ‘annual aggregate limit’ or ‘any one claim’ basis.

If a policy offers cover of £50,000 on an annual aggregate limit basis, that is the maximum the policy will pay out during a year’s insurance. For instance, if you had two claims made against you in any given insurance year, with the first one costing £35,000 and the second one £25,000, the total of £60,000 exceeds the annual aggregate limit of £50,000, so you would have to pay the additional £10,000 out of your own pocket.

Policies sold as ‘any one claim’, will pay out up to the full amount of cover on any number of claims. This type of policy clearly offers you a greater level of protection, so will cost a little more.

Finally, remember the cheapest policy may not be the best one.

Other types of business insurance

ByteStart has a series of practical guides to help businesses get to grips with the various types of business insurance, including;