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Professional indemnity insurance – what new business start-ups need to consider

September 26, 2011

If you are starting up a new business, and are providing professional services to clients, you may have considered taking out Professional Indemnity Insurance cover.

This type of insurance will cover you for any claims made against you as a result of work you have done for a client. It can also cover, dishonesty, loss or damage to the client’s data, defamation, and any alleged breaches of the client’s intellectual property.

Some professions require professional indemnity cover to be in place. It is also common for companies to insist that you have PI cover in place before they will hire you to perform work for them. This is especially true for consultants and contractors.

Even if you aren’t required to do so, you may decide to take out cover if you provide advice to third parties. The peace of mind it provides, can mean it’s money very well spent.

PI Insurance – Things for start-ups bear in mind

Before purchasing PI cover, there are several things you should consider:

1. Level of cover

Make sure you are adequately insured. Unless specified by the terms of a contract to provide work or services, many industry experts would suggest that you take out as much cover as you can reasonably afford.

Cover typically starts at around £100,000 and can go up to £2 million or even £5 million of cover.

2. Retroactive cover

As a business start-up, it is unlikely you will be concerned about potential claims which may arise from work you have done in the past, so you will probably not need to have a retroactive clause in your PI insurance policy.

However, if you did want to be covered for all the work you have done from the date you started in business, you can ask for a quote for retroactive cover. Clearly, you will need to declare that you have no reason to believe that any claims will be made against your previous work when you sign up.

3. Covered activities

Many insurers will cover specific trades or professions, such as consultants, accountants, engineers, etc. If you are not accepted initially using the standard application procedures, you may still be able to have a policy tailored to your needs by the leading insurers.

4. Run off cover

As most PI policies run on a ‘claims made’ basis rather than ‘occurrence’ basis, you could potentially be liable for claims from past clients long after your PI insurance policy has ended. Run-off cover will protect you against this kind of eventuality.

5. Limitations

Most policies will have a maximum turnover threshold – £500,000 or £750,000 are typical examples – and will only cover businesses employing up to a certain number of employees, e.g. 5 or 7 staff. You should be made aware of these limitations during the application process.

Where can I buy PI cover from?

You can buy PI insurance from a wide range of specialist insurers. Some enable you to get a quote and buy online.

As a business start-up, you may need to take out other insurance policies, such as public liability or employer’s liability. If you do, you may be able to get a single quote to cover everything you need. It will save you time, and very probably cost you less than it would if you were to buy separate policies.