If you are in business, or are starting up a new venture, and are providing any type of professional service to clients, you will need to look at taking out Professional Indemnity Insurance cover.
Professional indemnity insurance, or PI insurance, as it’s often called, 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.
It can also cover, dishonesty, loss or damage to the customer’s data, defamation, and any alleged breaches of your client’s intellectual property.
Whether you are starting out in business, freelancing for the first time, becoming a sole trader, setting up a limited company, or simply wondering whether you need to, or should take out a professional indemnity insurance policy, this guide covers everything a business owner needs to know. It explains how Professional Indemnity Insurance works, whether it’s relevant to you and gives you tips on how to choose the right type of policy for your business.
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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.
Should I buy Professional Indemnity insurance?
Professional indemnity insurance is mandatory for most of the regulated professions, including chartered accountants, solicitors and chartered surveyors.
It is also common for companies to insist that you have PI cover in place before they hire you to perform work for them. This is especially true for IT consultants and contractors.
Even if you aren’t required to do so, you may decide to take out cover if you provide any type of advice to third parties. The peace of mind it provides, can mean it is a very worthwhile purchase.
In days gone by, only those working in the ‘professions’, 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.
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.
Professions that should now take out PI cover as standard include;
- IT consultants and contractors
- Business advisers and coaches
- Business and management consultants
- Financial advisers
- Estate and letting agents
- Marketing and media professionals e.g. copywriters, social media consultants
- Educational consultants and inspectors
- Event and wedding planners
- Website designers and SEO professionals
- Health and safety consultants
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 protection will a professional indemnity policy offer me?
PI cover will typically protect you in the following ways:
- 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.
- A policy will also cover the costs of putting right any mistakes you have made.
- 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 PI 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 when you first started, 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.
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.
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 new businesses.
- Does the insurer have a good reputation?
- Do you feel the insurer will deal with a claim efficiently and pay out if needed?
Check whether the policy is on an ‘Annual aggregate limit’ or ‘any one claim’ basis?
When comparing policies, make sure you are comparing like for like. One key 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.
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.
Getting quotes and buying a policy
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.
New startups often ask; “is Professional Indemnity Insurance tax deductible?” It is a legitimate business expense, so yes, you can set the cost of the policy against your business profits.
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.
Finally, remember the cheapest policy may not be the best one.
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