What is professional indemnity insurance and do I need it?

Everyone has had a bad day at work. But for some, a work mistake can come at a cost (literally). That’s where professional indemnity (PI) insurance comes in.

PI insurance helps professionals and businesses (whether small or large) to recover financially from an incident where their client loses money because of their work – and takes civil legal action against them. It covers your legal defence fees and compensation payments. For professionals that provide advice and services, or handle sensitive data and intellectual property, it can offer a welcome peace of mind.

Here’s your quick guide to PI insurance.

What is professional indemnity insurance?

Sometimes, a piece of bad advice, faulty service or negligence at work can cost a client a significant amount of money. If this happens, clients can lay a claim against you for the losses and inconvenience they’ve incurred, and you’ll need to pay for legal defence and any necessary compensation if you lose. Professional indemnity (PI) insurance is the type of business insurance policy specifically designed to cover these fees.

Such errors can be big – for example, a flawed architectural design that requires a client to tear down a building and reconstruct it. They can also be small – and easily made – like a web designer using unlicensed photographs on a website, or a marketer making a typo on flyers that then require mass reprints. In the event of being sued, these professionals need to pay a lawyer to defend them in court, as well as the costs associated with rectifying and reprinting.

How does professional indemnity insurance work?

The purpose of PI insurance is to protect you against financial loss resulting from such claims of negligence or malpractice. It’s offered by specialist insurance brokers, and you can purchase either a ready-made off-the-peg policy, or work with them to draw up a custom policy that meets your specific needs.

Like any form of insurance, professionals or businesses pay a premium in exchange for a desired level of cover, and make a claim when needed. There is also an excess, and anyone with car insurance knows how this works: the higher the excess, the lower the premium.

PI policies generally have a pay-out limit of £1 million. However, solicitors have been known to request cover of up to £2 million.

Why is professional indemnity insurance important?

The history of PI insurance goes all the way back to the 1700s, when it was invented as a way to protect accountants, solicitors and architects from their occasional slip-ups. Today, PI insurance is as relevant as ever – if not more so.

Mistakes can happen much more easily in our complex, increasingly digital world, and a tiny error can quickly have severe consequences. It’s all too easy to accidentally lose a digital document or share it with the wrong people, and even one typo (such as an extra zero on a payment) can do a lot of damage to a client’s finances, business or reputation. 

No matter how careful you are, mistakes can always slip through. These won’t always be costly, but if you’re in an industry where they can be, having PI insurance can help you operate with more confidence.

What is covered by professional indemnity insurance?

PI insurance covers legal fees and compensation payments if a client sues you. Compensation payments can include covering financial loss, personal injury or property damage caused by you. PI insurance claim amounts can differ drastically, depending on the severity and cost of the error.

Policies differ, but this insurance generally protects against advice, service or designs that display any of the below. Importantly, these mistakes need to have been unintentional:

• Negligence or breach of duty: When a professional does not act with the required standard of care
• Errors and omissions: When a professional makes a mistake, or fails to include an agreed-on piece of information, which incurs unnecessary costs to rectify
• Breach of data protection and copyright: When a professional unlawfully gathers, uses or shares sensitive data, or commits plagiarism
• Breach of confidentiality: When a professional discloses sensitive, business-critical information to third parties without consent, resulting in business or financial loss
• Defamation: When a professional makes a false statement about a client, painting them in a negative light that costs them business
• Loss of documents: When a professional loses important or sensitive documents, putting the client at risk.

What isn’t covered by professional indemnity insurance?

 PI insurance doesn’t cover:

• Costs associated with a client’s reputational damage
  PI policies cover financial loss only, or costs related to personal body and property damage. If, as a result of your negligence, the client needs to hire a PR firm to recover from reputational damage, the policy may not cover these costs. They may therefore still try to recover such costs from  you.
  
• Public liability
  Public liability insurance is similar to PI cover. Both cover the costs of legal proceedings related to property damage. However, PI policies only cover personal injury to you and property damage caused by you. If your error injured or caused the death of someone else visiting your business, or led them to damage their property, the PI policy doesn’t cover these costs.
  
• Employer liability
  If other employees are injured at your workplace, the policy will not cover the related costs. You’ll need separate employer liability insurance for this.

Who needs professional indemnity insurance?

Any individual or business can benefit from PI insurance if a mistake could have a costly impact on a client. This includes those who offer specialist advice, services or designs, or those who deal with data and intellectual property. The list of professionals is long, including:

• Solicitors
• Accountants
• Architects
• Financial advisers
• Chartered surveyors
• Healthcare experts
• Advertising professionals (marketers, designers, copywriters, photographers etc.)
• Business consultants
• Public relations professionals
• Programmers
• Publishers
• IT service providers
• Recruitment consultants
• Interior designers
• Personal trainers

How much is professional indemnity insurance?

Like most insurance products, the cost of your PI policy largely depends on your circumstances. Because each industry and potential mishap is so different, there’s no one-size-fits-all policy.

Typically, insurers calculate the cost based on:

a) your type of profession

b) your annual turnover

c) any previous claims you’ve made

Insurers rank certain professions, such as solicitors, more high-risk than, say, personal trainers, making their premiums higher. As a general rule of thumb, premiums range between 0.25% and 5% of annual turnover. There is often a minimum premium requirement, which can range from £100 to £1,000 depending on the provider.

How much professional indemnity insurance do I need?

An independent financial adviser can help you determine the level of PI insurance cover you need, based on your risk profile and turnover. While calculating your cover, there are a number of questions an IFA will ask you, including:

• What’s the biggest mistake that your business could make?
• How complex would these issues be to resolve?
• Where could it cause financial damage, and how much damage could it cause?
• How financially powerful is your client? If they were to claim against you, do they have the resources available?
• Without insurance, could you afford the legal costs needed to defend yourself?

They’re not easy questions and won’t have simple answers. But an IFA is qualified to help you make an appropriate choice. They’ll also negotiate with insurers to get you the best deal, ensuring you don’t over or under-insure yourself.

Other FAQs

Is professional indemnity insurance a legal requirement?

PI insurance is not a legal requirement. However, if your profession is deemed high-risk, some professional bodies, governments and clients may request you have a minimum level of cover before allowing you to operate or doing business with you.

What is a retroactive date on professional indemnity insurance?

A retroactive date is the date from which an insurer agrees to cover you. It means that you cannot make a claim from any event that took place before this date. The purpose of retroactive dates is to prevent people from quickly purchasing insurance to cover a current challenge.

What is the excess on professional indemnity insurance?

Most insurance products have an excess, and PI insurance is no different. It’s a small percentage of the total sum insured that you need to pay at the time of the claim. Choosing a higher excess will make your PI premiums lower, but you’ll need to pay more from your pocket in the event of a claim.

Do I have to pay VAT on my professional indemnity insurance?

You don’t have to pay VAT on PI premiums. However, you do need to pay insurance premium tax (IPT), which for PI insurance is subject to the standard rate of 12%. When you get quotes from insurance providers, IPT will already be included in the total figure quoted, so you don’t have to factor it in yourself.

Did you find this article helpful? Then you might find our article on indemnity insurance when buying or selling property informative, too!