Who needs professional-indemnity insurance?
Whilst there are many benefits of running a business, there are also various risks. You or your employees may make a mistake or be negligent which could cause problems for your clients. These could result in expensive and lengthy lawsuits, even if a claim is made when you are sure that you did nothing wrong.
You may be expecting a lawsuit after a particular incident or they could come completely out of the blue, which can affect your ability to continue offering services or trade. As with other areas of your business, it’s a good idea to have insurance that can help protect you and deal with these types of incidents.
Professional indemnity insurance is one type of insurance that most businesses choose to invest in. Whether you’re a sole trader or part of a large company, this type of insurance can help you by offering financial and legal protection should you need it.
In this guide, we’ll talk you through what cover you can expect with professional indemnity, along with the various levels of cover and which professions would benefit from this type of insurance.
Who needs professional indemnity insurance?
It isn’t a legal requirement that all businesses must have professional indemnity insurance, but some professional bodies insist on it as a trade requirement. This includes professions such as solicitors, accountants and financial advisers as well as some healthcare professions.
Other professions that usually have professional indemnity insurance include marketing agencies, as well as PR firms, management consultants and design companies. This is also a popular type of insurance with smaller businesses, self-employed individuals and businesses that handle sensitive and personal data. Some clients may also require you to have this insurance as part of your contract.
Continue reading to find out how professional indemnity insurance could benefit you and your business in the future.
What is professional indemnity insurance?
Professional indemnity cover, sometimes referred to as PI insurance or professional liability insurance, is a popular type of business insurance. It can protect you and your business if you need to compensate a client after making a mistake that caused them reputational or financial loss. The insurance could cover you for compensation payments and legal costs that result from the client suing your company for professional negligence or willful wrongdoing.
Compensation and legal fees can have a significant impact on your business, along with the potential loss of trading that could occur from the case. The costs can vary depending on the severity of the claim and the compensation that is awarded to the client.
Professional indemnity insurance can help to cover these costs and lessen the financial strain on your company. It’s a good safeguard to have on hand if your company gives out professional advice, handles a client’s data or copyrighted material or works on and repairs a client’s property. Whilst nobody expects mistakes to happen, it’s a good idea to be prepared in case something goes wrong and the client isn’t happy with your work and decides to sue for damages or financial loss.
What does professional indemnity insurance cover?
There are a variety of situations where professional indemnity insurance can help you financially if a client makes a claim against you. This includes some of the following circumstances:
Professional negligence
This is likely to occur if your company gives out professional advice to clients, for example, if you are a solicitor or accountancy firm. A client may sue you for poor conduct or for providing advice that resulted in negative consequences for the client. In some instances, it may also include when a client overspends on their budget and make a compensation claim against your company.
Defamation
In some instances, you may need to make statements about your client, especially if you work in a PR agency, for example. However, your client may claim that a statement you have made about them is untrue and has damaged their reputation.
Breach of confidence
You may breach a client’s confidence if you share information such as copyrighted or trademarked material without their prior consent. This may be unintentional, but sharing your client’s intellectual property without permission could be cause for a lawsuit.
Property damage
A client may make a claim against you if you damage a building or its contents when your company is doing work on it. This can also include other types of property, such as a client’s website, for instance.
Lost or damaged documents
Clients may entrust you with important or sensitive documents as part of your work. If you lose these documents, it could be cause for a compensation claim.
Employee cover
An individual employee may cause financial or reputational loss to your client, which could cause the client to make a direct claim against them.
What doesn’t professional indemnity insurance cover?
Whilst there are many situations that are eligible for cover under professional indemnity policies, there are also some circumstances that don’t fall within its cover. For example, you wouldn’t be covered if a claim was made concerning work that took place before you had bought the professional indemnity insurance. However, you can instead buy a ‘retrospective policy’, which will insure you for work conducted from a set date before the policy was bought.
This type of insurance won’t cover you for injury or damage that is caused to members of the public or their property by a fault on your company’s part. Instead, this type of incident would fall under the requirements of another type of business insurance – public liability cover.
Your company also isn’t covered under any professional indemnity insurance policy if an employee is injured or falls ill whilst working for you and subsequently makes a claim. You will instead need employer’s liability insurance, which is a legal requirement if you hire one or more people. It is compulsory to insure your company with cover of at least £5 million. Otherwise, your company could face a fine of £2,500 on a daily basis until you buy it.
Your company isn’t covered by professional indemnity insurance if you decide to cancel your policy because you are changing jobs or retiring. In these instances, you may want to consider a run-off policy that will cover you for any future claims that are made after your initial insurance cover has expired. Clients can make claims against your company for up to six years after the incident occurred, which is the length of time that a run-off policy may prove beneficial. A run-off policy will also protect you if you decide to change insurers and want cover in the transition period.
How can I make a claim on my professional indemnity insurance policy?
Most specialist insurance brokers offer this type of insurance on a claims-made basis. You will only receive cover under your insurance policy if the claims are made whilst you are within the term of your policy. This means that you won’t be covered for a claim that has been made after your insurance policy has expired, even if the claim concerns an incident that occurred whilst you were covered by the professional indemnity policy.
It’s advisable to notify your insurance broker as soon as you are aware of a mistake or incident that could lead to legal ramifications in the future. You may become aware of a client criticising your work, a passing threat or even a refusal to pay, which could all escalate to a claim in the future. It goes in your favour if you report this to your insurance broker before the client makes a case against you because the insurance company will have extra time to prepare your defence.
Insurance companies usually advise that you don’t admit liability in the face of claims or try to resolve the issue yourself. This can prejudice your insurer’s position, which could affect your cover and, therefore, how much money you have to pay out.
Your insurance company will need to approve all legal representation before they begin work. This is so that they can approve the cost or assign you legal representation from their in-house team. Your solicitor and insurance company need to have matching objectives in terms of cover. Insurance companies can refuse to cover your legal fees if they haven’t offered prior agreed to something that your solicitor promises you.
It’s a good idea to contact your insurance company as soon as you become aware of an issue evolving. They can advise you on the situation as early as possible, which can help prevent the issue from escalating and becoming a big legal matter. Many insurers include a clause in their policy that states that they need to be notified of issues early on if a claim is made. You may not be covered by the policy if you notify the insurance company too late in the proceedings.
FAQs
How much cover should I get with professional indemnity insurance?
The level of cover you need will depend on the type of work that your company does. Businesses with higher risks will need more cover than companies with lower risks. The best way to think about the level of cover you need is to think of the worst-case scenario and consider how much it would cost you to solve. This could include calculations such as how much a client is likely to ask for in compensation, legal fees and any additional costs that are needed to resolve the issue.
It’s also worth considering the type of client you work with. Larger companies tend to have the backing of legal departments that will be quick to issue you with lawsuits if they feel that they have a claim. Smaller businesses, on the other hand, might be more laid back or less likely to make compensation claims as they don’t have the finances or resources to pursue a claim.
There is no set professional indemnity insurance cost due to the variety of cover that is available. Some companies opt for cover of around £250,000, whilst many other companies choose to have professional indemnity cover of at least £1 million to account for compensation claims and expensive legal fees. The amount you choose will depend on your company’s individual situation, which is why it’s a good idea to consult with an insurance broker to see the type of policies and cost that is available and will suit your business requirements.
Is professional indemnity insurance tax deductible?
As professional indemnity insurance is a type of business insurance, it is considered an allowable expense and is, therefore, tax-deductible. Allowable expenses are essential costs that help to ensure the smooth running of a business. You can subtract business expenses when calculating the total cost of your company’s taxable income as they are exempt from tax.
It’s important to keep track of your spending on business expenses so that you can provide HMRC with evidence and receipts should they need to conduct a check. This information can also be passed on to your accountant so that they know to include the cost of the insurance when calculating the total taxable income on your behalf.
Summary
Although professional indemnity insurance isn’t a legal requirement, businesses from various types of industries consider it a necessity. The insurance can help you cover legal fees, and compensation claims should a client make a case against you. Businesses such as solicitors, accountancy and financial advisors often invest in this type of insurance as clients could sue if they feel that they suffered financial or reputational damages because of the work you conducted or the professional advice you gave.
Professional indemnity insurance is also popular amongst marketing agencies, PR companies and design businesses as they deal with copyrighted material and often act publically on the behalf of clients. This type of work comes with some level of risk as clients could sue for breach of confidentiality or act of defamation if they feel that your company didn’t portray them accurately or mishandled their material.
Many professional bodies or regulators in various industries require businesses in the trade to have this type of insurance. For example, this is the case for many solicitors, architects and healthcare professionals. Other types of businesses such as consultancies and advertising agencies choose to have this insurance to ensure they are fully protected against any claims that may be set against them.
