Professional indemnity (PI) insurance is important because it removes the financial risk involved in selling a professional service or advice. A company or individual may not give their best knowledge fearing a riskier strategy could fail, despite it also potentially reaping more reward for the client.
With legal costs and damages potentially costing hundreds of thousands of pounds, if not millions in some rare cases, businesses without professional indemnity insurance may also charge customers more by absorbing the risk themselves, just in case they have to pay compensation.
Having professional indemnity insurance in place removes both of these problems meaning a business can run more competitively and hopefully provide a better service for it.
Professional indemnity insurance safeguards a business that sells expertise, knowledge, advice, or provides a professional service. If a decision it makes or advice it gives causes a client to lose money, and it could be pursued for damages. The insurance covers both the legal fees related to dealing with a complaint and any compensation and costs awarded.
There are also many industries where a subjective brief is given, and if the results do not match a client’s expectation, they could sue for damages, claiming it would cost them money to put right any problems.
Industries that deal with giving advice or are hired to carry out a task where specific expertise is required should have professional indemnity insurance. Costs can vary from under £100 to tens of thousands of pounds, even for a small business. If you want to find out how much PI insurance will cost you, get multiple professional indemnity insurance quotes to see how the market prices your specific business risks.
Why do you need professional indemnity insurance?
Professional indemnity insurance is needed because no matter how diligent a company or individual is, mistakes can still happen.
Not only can professional indemnity insurance cover professional negligence, defamation and copyright infringement, but there are also some incidents that some would consider more unavoidable.
These can include:
Losing or damaging documents: Either while these documents are under the policy holder’s responsibility, or if they were lost or damaged at the client’s end due to something the policyholder had done, e.g., sent them a virus.
Confidentiality breaches: Where sensitive information is shared, potentially by a dishonest employee.
Acts or omissions of subcontractors.
Bodily injury: If a customer, their employee or other third party is injured due to a policy holder’s negligence.
However, each policy is different, so be sure to check the policy wording to see what you’re covered for and what you’re not covered for.
How long to keep professional indemnity insurance?
When looking at how long to keep professional indemnity insurance, there are some essential policy rules to know.
The continuous cover is strictly advised. There is a special inclusion in many professional indemnity policies called ‘claims made’ – or a ‘retroactive date’ if switching to a new policy. This sees insurers honour a claim about an incident that took place at any time during which the business held a continuous policy.
A retroactive date is a type of assurance that covers the ‘claims made’ basis but when switching providers.
However, should there have been a break in cover, even if just for a day, then the ‘retroactive date’ will be the first day of any new policy subsequently secured after that, for however long cover is continuous.
‘Claims made’ or ‘retrospective date’ policies are vital because it can often be some time between a service being provided and an issue arising. A client may only be notified of a breach of copyright six months after the work was completed, or an architect’s huge tower block design may take years to complete. The policyholder needs to be covered at the time of the claim and at the time of the incident, with a continuous cover in between.
Thus, it is also crucial to purchase a professional indemnity insurance ‘run-off’ for when a business or individual leaves the profession. A run-off is advised to last about six years after a business ceases trading, according to experts.
How long does professional indemnity insurance last?
Professional indemnity insurance often lasts longer than the current policy length (which is usually 12 months) under what is known as a ‘claims made’ policy.
A claims-made policy protects a business for as far back as the insurance policy has been continuous. If a business bought its first professional indemnity insurance package in 2012 and kept up to date until the present day, a provider with a ‘claims made’ assurance would deal with any incidents since 2012.
A retroactive date is similar and means a business will protect incidents during continuous cover dating back to the retroactive date, even if it changes providers partway through.
The important thing is that the insurance is continuous. Any break in insurance cover will reset the clock from when the next policy goes live.
What is not covered by professional indemnity insurance?
Professional indemnity insurance does not include public liability – where a third party is injured or has property damaged on the business premises. Businesses will need to take out separate public liability insurance for this.
Bankruptcy, insolvency, fines and penalties are also not usually protected, along with vehicle insurance and product liability. There are separate policies for these safeguards.
There are many common exclusions to professional indemnity insurance, with UK providers refusing to meet a claim if the financial loss results from terrorism, war, pollution, and radioactive contamination.
Each policy will also have a set limit to what can be claimed. This will either be classed as ‘any-one claim’ or ‘aggregate’.
‘Any-one claim’ gives each individual claim its own limit, while an ‘aggregate’ policy sets a total limit for claims made against a company during the period of cover.
Experts report an increased number of litigation claims made against businesses, and some now suggest increasing claim limits to £1 million.