Professional Indemnity Insurance Explained – 12 Things You Need to Know

Professional indemnity insurance (PII for short) is a type of business liability insurance. It covers businesses and individuals against compensation claims made by clients for alleged negligence or inadequate services.  

In short, professional indemnity insurance covers those who provide expert services, advice or consultancy to other parties.

Examples of people that might need PII include consultants, solicitors, architects, financial advisors, accountants and designers.

PII helps companies manage risk should clients make a claim against them. The value of claims can soar, especially when you take into account legal representation, damages and the cost of putting things right. Companies without insurance can take a massive hit from such claims. Claims from which they might not recover. 

Essentially, if you make a mistake and someone makes a claim, without PII you could be liable to pay a very large amount of money in compensation. Is that really a risk you can afford to take?

When you enter into a working contract, you owe your client a ‘duty of care’. A duty of care requires professionals to act with a ‘standard of care and skill’ that is reasonable for a competent member of their profession. It may be set out in a company’s terms and conditions or initial contract with the client.

If they allege you have breached this duty, they will be eligible to make a claim against you. Claims can include:

• Professional negligence – If you provide incorrect advice to a client or make a mistake in the course of your work.

• Defamation – If you release or support statements about the client that are classed as libel.

• Breach of confidence – If you share sensitive information about the client or project without their permission.

• Breach of copyright – If you infringe on any copyright, trademarks or intellectual property.

• Loss of documents – If you lose or damage documents pertaining or belonging to the client.

• Employee dishonesty – If one of your employees acts maliciously towards the client, causing them financial loss.

In essence, if you advised or did work for a client, which caused them to suffer either financial or reputational loss, PII can cover you for any claims the client may make. 

Claims relating to bodily injury generally aren’t covered by PII, with the exception of claims resulting directly from your breach of duty of care. For example, a claim could be made against a health and safety consultant where negligent advice has resulted in personal injury. 

PII protects you regardless of whether a claim is justified, covering legal fees, compensation and rectification costs including, in some cases, PR and crisis management. 

If you’re aware of a potential claim or circumstances that may result in a claim against you, you must notify your broker or insurer as soon as possible. The insurer will advise you on the next steps. If it is a large claim, they may appoint a claims manager or a legal professional to defend your claim. For smaller claims, an insurance underwriter or consultant will usually handle your claim. 

If your claim is covered by your policy, you will need to pay any excess as defined in the policy wording. While any costs over and above your excess will be paid by the insurer. 

Not in the UK, but PII is considered mandatory for most regulated professions, including solicitors, architects and financial advisers. If you work in a regulated profession, it is worth checking whether you need PII. The following regulatory bodies have given guidance for their members…

Solicitors Regulation Authority (SRA):

 ‘All SRA authorised firms must have a valid professional indemnity insurance policy to be able to carry on a practice.’

Royal Institute of Chartered Surveyors (RICS): 

‘A firm shall ensure that all previous and current professional work is covered by adequate and appropriate indemnity cover that meets standards approved by the Regulatory Board.’

Institute of Chartered Accountants in England and Wales (ICAEW): 

‘Professional indemnity insurance is compulsory for all ICAEW members who have a practising certificate and engage in public practice.’

General Medical Council (GMC): 

‘If you work for an NHS or HSC body, the organisation you work for will receive indemnity through a clinical negligence scheme…If you carry out private or independent practice, you must arrange adequate and appropriate insurance or indemnity.’

Architects Registration Board (ARB): 

‘Standard 8 of the Architects Code: Standards of Conduct and Practice states that architects should not undertake professional work without adequate and appropriate Professional Indemnity Insurance (PII) cover…The minimum level of indemnity cover expected by the Board is £250,000.’

Some companies will require you to take out PI if you are acting as a consultant or hired contractor. 

Top tip: In today’s litigious culture, consider it a marketing asset if you hold professional indemnity insurance. Many companies when looking to outsource work will favour those who are adequately covered.

Yes, professional indemnity insurance is tax deductible. This type of insurance is classed as an allowable business expense and can therefore be subtracted from your taxable income. Most business insurance is tax deductible, including public liability and employers’ liability insurance. It is important, therefore, to keep your policy documents and insurance receipt secure. 

Errors & omissions insurance (E&O for short) and professional indemnity insurance are in essence the same thing. While policy details will vary, both cover businesses in the event of compensation claims, where a client alleges you’ve been negligent or acted in error.

‘E&O’ is a term more commonly used in the USA. While in the UK, people tend to refer to it as ‘professional indemnity’. 

The safe handling of data and the rise of cyber crime has made a huge impact on the insurance industry. As a threat that is relatively uncharted territory in terms of insurance claims, it is not guaranteed that your PII policy will cover you in such instances.

Some professional indemnity insurance policies do offer cover against data breaches as a result of third party hacking, as this is often encompassed by broader clauses. 

Cyber insurance can cover you in cases of data breach. However, it is important to look closely at the policy to be certain of exactly what claims can be made. 

When it comes to insurance, one size doesn’t fit all. If you’re looking for a PII policy, you’ll want one that contains specific wording and cover that can be tailored to your needs. A generic, ‘catch-all’ policy might not measure up when it comes time to claim. 

Other things to look out for:

How much is the excess?

Check how much excess you will have to pay for professional indemnity insurance claims. Most insurers will have a typical excess amount. Although you can often negotiate when buying your policy.

Pay monthly or upfront?

Can you pay for your PII cover in monthly instalments or do you have to pay it all upfront? If payments can be made on a monthly basis, will they be interest free?

Administrative fees

Check your policy for potential administrative fees, as these can often be expensive and take people by surprise.

Reputation of the insurer

Do your research and find out about the reputation of your proposed insurer. Are they known to be helpful when processing claims? Or do they rarely pay out?

‘Annual aggregate limit’ or ‘any one claim’?

When looking for professional indemnity insurance, you’ll check whether your policy will be on an ‘annual aggregate limit’ or ‘any one claim’ basis.

In annual aggregate limit policies, the cover amount is the maximum the insurer will pay out per year towards the cost of claims. Once it’s gone, it’s gone. 

By comparison, any one claim policies will pay out the full amount of cover on any number of claims. This ensures a greater level of protection, but understandably will be more expensive.

Run-off cover

If your business ceases operating, you could still be held liable for claims made by past clients, even after your policy has ended. PII is on a claims made basis, meaning even if you were covered when you did the work, if your policy is no longer active when the claim is made, you won’t be covered. 

Many companies have taken out PII cover for the duration of a project, reducing the level of cover or simply not renewing after the project is complete. They can later run into difficulties if the client claims against them and their insurer won’t pay. 

To tackle this, some policies include run-off cover, which covers you for a certain amount of time after the policy has ended (typically around six years). 

Retroactive cover

Many policies will come with the option to add retroactive cover to include work already done when you take out the policy. The date from which the retroactive cover applies should be set out in the policy wording. If it is not, this may mean that it covers the entire time you have been in business. But it is always worth checking, just in case. 

Policies that include retroactive cover will often require you to sign a declaration stating you have no reason to believe any claims will be made against you for work completed. 

It’s impossible to give an exact figure for how much PII you and your business will need. The amount will vary, based on a number of factors. 

Depending on the industry you’re in, there may be a required cover amount. For architects, for example, the minimum level of cover expected by their regulatory body is £250,000. Similarly, if you are working for a client, they may require a certain level of cover. Even if they don’t, it’s worth considering the size of the clients you’ll be providing services for. 

The bigger the client or project, the more costly mistakes can be. Your level of cover will need to match the potential cost of compensation, should a claim arise. It will also depend on the nature of the work you do, as negligence in some fields can be more costly than in others. The lowest level of cover available is around £50,000. 

Professional indemnity can also cover legal fees and the cost of putting right any mistakes. So, you’ll need to figure out exactly how much these factors might set your company back.  

Your cover amount should also take into account where in the world you work. Insurance contracts will need to comply with any limits or requirements of the countries in which they’ll need to apply. Cover is typically separated into UK, EU, worldwide excluding the USA & Canada and worldwide. Given the well known highly litigious culture of the United States, it’s unsurprising that insurance covering potential claims there is more expensive. 

No one likes to consider worst case scenarios. But doing so could help you determine how much cover you’ll need and make sure you aren’t underinsured.  

While certain professions require PII cover, others wonder whether they really need it for their type of work. According to statistics, there are now over 500 different occupations that rely on PII.

Professional indemnity insurance isn’t just for large companies. Whether you’re a freelancer, a two person startup or a multinational consultancy, the cost of negligence claims can cripple your business.   

You may find that your clients require you to have PII, or that having it gives you a competitive advantage when marketing your services. 

Basically, if you provide advice, professional services or handle other people’s information, you should consider getting PII cover. 

Some other professions that might need PII:

• IT consultants
• Travel agents
• Business advisors and coaches
• Counsellors
• Charities
• Business and management consultants
• Contractors
• Financial advisors
• Pharmacists
• Engineers 
• Estate and letting agents
• Marketing and media professionals
• Educational consultants and inspectors
• Event and wedding planners
• Website designers
• Graphic designers
• Health and safety consultants
• Personal trainers
• Bookkeepers

Even insurance brokers should have a PII policy!

Examples of PII claims

Example A:

A marketing agency publishes an ad for a client containing incorrect information, causing a loss of income for the client. 

Example B:

An accountant uses the wrong data when calculating income tax returns resulting in a financial loss for the client.

Example C:

An IT firm installs inadequate software for another company, which must be rebuilt and causes the company to lose revenue.

Professional indemnity insurance for freelancers and subcontractors

If you’re a subcontractor or a freelancer, you’ll want to check if you’re covered through your employer’s policy. Some company PII policies will exclude claims made against freelancers and subcontractors, so it’s worth checking. Or take out a policy yourself. 

If you’re retired, you might still need PII cover

Think you no longer need professional indemnity cover after you’ve retired? Think again. 

Claims can still be made against you for work you’ve done after you’ve stopped working. As PII operates on a ‘claims made’ basis, if you no longer have cover, you will not be able to claim (even if you had a policy at the time of the work being done). This could be very expensive.

Investing in a policy that provides run-off cover is a good idea if you want to enjoy your retirement without worrying about potential claims. 

Beware ‘friendly advice’

Unfortunately, even if you provide your services free of charge, you can still be claimed against. This includes what you might have thought of as simply ‘a bit of friendly advice’. Keep this in mind next time someone asks for your professional advice. A duty of care may still apply, leaving you potentially exposed.

If you’re looking to buy professional indemnity cover, the best thing to do is to speak to an insurance broker who will obtain relevant PII quotes to find the best one for your business. 

It’s important to be aware that not all brokers can give specific advice. Before speaking to an insurer, check whether they operate on a ‘non advised sales’ or ‘advised sales’ basis. Firms that work on an ‘advised sales’ basis can provide guidance specific to your needs. 

For more advice about different types of liability insurance, stay tuned to our blog. Or call Dover Street Insurance Brokers on 0208 057 4130 to speak to a member of our team.