Professional Indemnity Insurance

This essential business insurance, known as Professional Indemnity, PI or Professional Liability insurance, is designed to cover you against claims from mistakes you may make in your business where you may find yourself in a dispute with your customers.

Every business faces certain liabilities in its day to day trading, and PI insurance cover provides peace of mind against claims.

What is Professional Indemnity Insurance?

As the name implies, PI insurance indemnifies or protects you against professional or business mistakes. These can occur honestly or dishonestly by you or your employees where a third party suffers a financial loss as a result of you or your company's actions.

The insurance is designed to meet the costs of the action taken to include any damages awarded by a court and legal costs. Legal costs incurred may either be for challenging the action against you or simply completing the necessary judicial paperwork.

This indemnity insurance primarily helps people in professional occupations that provide advice to other businesses or individuals. In the era of "no win no fee" lawyers, there are many more cases being taken on for even the slightest potential judgment against companies.

You can get a free professional indemnity quote online in a matter of minutes to see how much it's going to cost you.

Examples of Potential Insurance Claims

An architect developed plans that had missing information, so they had to be redrawn, thus delaying the development. The insurance company awarded the business the full costs of updating the documents and onsite delays for staff wages.

An IT contractor develops some software that contains lines of code causing the software to crash or infect another system with a virus.

What Actions Does Professional Indemnity Insurance Cover?

As mentioned the insurance covers your business against mistakes made that impact your clients if you have been negligent in some manner. The policy insures your business against costs arising from:

  • The loss or damage to data, documents or electronic files.
  • Dishonestly by directors or employees.
  • Intellectual property rights infringement or breach of rights.
  • Breach of copyright.
  • Breach of confidentiality.
  • Negligent acts while on duty.

What Costs Will Professional Indemnity Pay Out?

Usually, PI insurance covers you against claims made and your legal costs. The limit of indemnity required varies considerably depending on your industry. Minimum policy pay-out levels start at £100,000 although with legal costs increasing it's best to increase this to at least £250,000 of cover.

Policies normally cover up to £5million, but it will depend on the type of business you have, the client base and the value of contracts you manage. The cover will usually pay for the following:

  • To settle any claims for damages against you.
  • Your legal costs.
  • Breach of copyright.
  • Slander and libel intentionally or unintentionally.
  • Potentially covers you against claims made before the policy is taken out.

Speak to your broker to see what type of cover you may require.

Generally, a settlement is agreed with the court to cover legal costs and damages together.

Trades That May Require Professional Liability Insurance

Almost all businesses should consider taking out professional liability insurance, and these include accountants, solicitors, tradespeople, hairdressing salons, computer and IT consultants, builders and cleaners. Certainly, contractors should consider PI insurance as it may support their independent status when thinking about IR35 issues and tax standing.

Some professions are required to have PI cover as a statutory requirement or required by their professional body and membership. These include law firms, accountancy firms, architects, insurance brokers and financial services companies such as financial advisors and mortgage intermediaries. You can get a free professional indemnity quote online in a matter of minutes to see how much it's going to cost you.

What is the Likely Cost of a Professional Indemnity Policy?

As the marketplace is now competitive, rates have certainly fallen. It's best to get quotes either via brokers or online to compare rates and policies - remembering to read the small print.

Your Industry and Risk Profile Dictates Your Premium

The price of a policy varies by the amount of total cover you require, the turnover of your business, the nature of your business and the risk profile of your business. The quotation process takes account of all these factors to calculate a price.

The risk profile of your company is perhaps the most important as insurers will look at the exposure of your business, the types of products and services you are selling and the management of your business. The insurer takes into account if you have self-employed staff, what control systems you have in place, the client to advisor ratio, the qualifications of your staff and any claims history you have. You should disclose as much information that you have of material facts as failure to disclose may invalidate your policy.

Example Costs of a Typical Policy

The annual cost of the insurance could be around £160 for £2 million of cover if your business turnover is less than £50,000 and around £1,500 per year if your business turnover is £500,000. If you require £2 million of cover and is a small price to pay to cover you against mistakes that could happen in your business.

As with all insurance PI, is fully deductable against tax. The Financial Conduct Authority regulates PI in England and Wales. This page does not constitute professional financial advice, and you should speak to a financial advisor if you're unsure of any details about professional indemnity insurance for your business.

Remember to deduct the cost of this insurance in your profit and loss statement as professional services expenses.