What is Professional Indemnity Insurance? The complete guide
As a professional, it’s difficult to imagine any of your clients being so unhappy with the service you provide that they’re prepared to sue you for damages.
But in today’s ‘no win, no fee’ culture you must be prepared to deal with the fact that this could become a reality.
You share your highly-specialised knowledge, advice and skills with your clients, so you need to protect yourself and your business in case you need to pay to correct a mistake. Even if you're not in the wrong, you'll still need to cover the costs of defending yourself if the case goes to court.
The type of policy you need to protect your business in the event of a reputation-damaging dispute with a client is professional indemnity insurance, also known as PI.
Offering the service that you provide can come with risks, but you can help to mitigate these by having the right insurance in place.
What is professional indemnity insurance?
Professional indemnity insurance is like a parachute for your business. You wouldn’t dream of jumping out of an aeroplane without the security of knowing that you have a parachute strapped to your back, would you?
Then why would you risk damaging your reputation and losing your business by not having the right level of insurance in place?
This type of insurance is designed to give you the confidence when offering clients the service you provide. If a client accuses you of giving them inadequate or inaccurate advice, you’ll have the peace of mind that the cost of your legal defence, as well as any compensation, will be covered.
You may also hear professional indemnity insurance referred to as errors and omissions insurance. It's essentially the same cover, just with a different name. This type of liability insurance tends to be called professional indemnity in the UK and errors and omissions in the US.
Whatever you want to call it, protecting yourself with the necessary insurance is highly recommended. The alternative could see you and your business freefalling to the ground without the ability to get back up again.
What does it cover?
Unfortunately, when an oversight is made in your line of work, it's not as easy as hitting the backspace button to rectify the error. When you're providing advice to your clients, an inaccuracy as seemingly inconsequential as a spelling mistake or a miscalculation can result in them losing money or confidential data.
Here are some of the risks that the insurance can cover:
Protection against negligence is at the core of a professional indemnity insurance policy. This is because no matter how careful you are, or how robust your processes are, mistakes still can and do happen. So, if you're working for a client and an error is made, or you fail to do something, then you're deemed to have been negligent.
Infringement of intellectual property
Just because images are available on the internet, it doesn't mean that you can use them. The same goes for slogans, logos or designs. In fact, intentional, or accidental, use of someone else’s intellectual property without their permission is a breach of copyright law.
Loss of data
If you have access to a client's data or important documentation, then it's your responsibility to keep them safe. If you lose them or they end up in the wrong hands, your client may seek compensation.
If a client accuses you of defaming them, they may believe that you have made a statement that could damage their reputation. Libel (anything which is spoken) and slander (anything which is written) are both forms of defamation and could result in legal action being taken.
Remember: Professional indemnity insurance will also cover the legal fees incurred in the defence and settlement of any claims.
Who needs it?
If you provide a professional service in exchange for a fee, then chances are you’ll need professional indemnity insurance.
Many professions are required to have it as a regulatory requirement, but it's not mandatory for all.
The insurance is compulsory for accountants and architects, for example. The same is likely to be true of other professions that are governed by an industry regulator.
Although not all professions mandate the need for professional indemnity insurance, you can become liable for a claim regardless of the advice or service you provide if you make an error or omission. As such, there is a wide range of professionals who need professional indemnity insurance, but some are at more risk than others.
Here are just a few of the high-risk professions that should put buying insurance at the top of their ‘to do’ list:
Architects are exposed to the risk of insurance claims more than most because of the vast repercussions a simple mistake can have. For the clients of architects, an inaccurate drawing or an incorrect measurement can result in a devastating financial loss.
As the technological world grows, so do the risks associated with handling electronic customer data. And the introduction of the General Data Protection Regulation (GPDR) on 25th May 2018 will make things even tougher for IT professionals. Breaches can not only result in an insurance claim, but GPDR can impose fines of up to £20m (or 4% of global turnover) for the loss or mishandling of client documents and data.
Accountants are also at risk of facing claims following the loss or misuse of financial data. However, because of the detailed nature of their work, accountants are under pressure to ensure the accuracy of their calculations or risk impacting their clients’ financial position massively.
People who work in marketing and communications professions are feeling the effects of increased regulation within the media industry. The risk of legal action for copyright infringement and company defamation is also heightened due to the nature of advertising copywriting and design.
Note: This is far from an exhaustive list. Professionals from solicitors to software engineers and fitness instructors to freelancers; in fact, anyone who offers advice, designs or provides a professional service will almost certainly need professional indemnity insurance.
How much cover do I need?
No two businesses are the same, and so it makes sense that the amount of insurance you need to protect it will be different too.
Most policies will allow you to vary your indemnity levels from £250,000 up to £5 million. But how do you decide how much cover you need?
It will be different for every business, but you should consider the needs of your regulator or professional body, your client contracts, and the risks you face when choosing your cover level.
Regulator or professional body
If you're a member of a professional industry body, it’s worth checking if they specify a minimum level of professional indemnity insurance that you should hold. You can find this level on your membership agreement or by contacting your industry body to ensure you have the right cover in place.
Note: If your profession is regulated by the Financial Conduct Authority (FCA) you’re required to hold more than £1 million of cover.
If you’ve agreed to a contract with a specific customer, client or organisation, they may insist that you have a minimum amount of insurance before you can undertake any work.
You may have to comply with certain minimum requirements, but it’s up to you to decide if your business needs a higher level of insurance. When you’re reflecting on how much cover to buy, consider the things that could go wrong, the size of your contracts, as well as the potential cost of a compensation claim if a mistake was to be made.
Determining the right amount of professional indemnity insurance to buy isn't an exact science but getting it right is critical for your business. Give some thought to the worst-case scenarios, not just those that are most likely to happen. If an unexpected claim occurs and you’re underinsured, it could have disastrous consequences.
How are the premiums calculated?
As with any type of insurance, the cost of your professional indemnity insurance premium is based on many different factors.
Your insurer will ask questions about your business and the answers you give influence the amount you pay. These factors include:
The size of your business – Your insurer will consider your annual turnover to determine the size of your business. The equation is simple. The more money you make, the more work you do, the higher the risk of a claim; the higher the risk of a claim, the more expensive your insurance will be.
The type of service you provide - Some professions are deemed to be exposed to risk more than others which influences the price you pay. If you work in an industry where your negligence would result in significant financial consequences, you can expect to experience higher insurance premiums.
The level of cover you need – The more you need, the more it will cost – simple. If you were to have £5million Indemnity cover, it would cost you more that to have £250,000 worth of Indemnity cover. This reflects the extra exposure to risk for the insurer.
Any additional insurance that you need – It’s likely that you’ll need more than just professional indemnity insurance to protect your business. If you come into contact with your clients, either on your premises or theirs, for example, then you may need public liability insurance. Also, if you have any employees, then you'll almost certainly need employers' liability insurance which is a legal requirement. Depending on the type of business you run you may need to consider other covers too. The more insurance you need, the more you’ll pay.
What key things should I know about professional indemnity insurance?
Although professional indemnity insurance isn't a legal requirement, it could be the key to unlocking your professional confidence.
As a reminder, here are some things you should consider before buying your insurance:
- Do your homework and research what the insurance consists of, the cover limits available, and why it's vital that you have it.
- Your insurance can be tailored to be as individual as your business. Assess what you need and buy the cover that’s right for you.
- If you’re in doubt, it’s better to have more insurance than you think you need rather than risking being underinsured and having inadequate cover in place.
- Give some thought to other types of insurance that you may need. Many insurers offer a combined package which will enable you to insure your business against several different risks on one policy.
Sharing your knowledge, experience and advice in a professional capacity can be very satisfying. But you should remember that with the rewards come risks. Unfortunately, you may have clients that are not happy with the service you've provided which is where professional indemnity insurance comes in.
So, are you ready to get your professional indemnity insurance sorted?
Having the right level of insurance in place gives you valuable peace of mind that if you make a mistake, then the legal costs and any compensation claims will be taken care of. This also benefits your clients as it means that you don’t have to increase the fees you charge for your services to cover the cost of ‘what if’.
By being adequately protected, you'll be covered against many unexpected and unwanted claims and can operate more competitively as a result.
More about Professional Indemnity Insurance.
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