Updated 03 December 2020
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 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.
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.
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.
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.
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:
PI insurance doesn’t cover:
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:
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.
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:
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.
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.
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.
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.
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 10%. 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.
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