Professional indemnity cover provides protection for individuals who run their own business and provide advice or services to clients. Should a mistake or flawed piece of advice lead to a negative effect on a client or customer, it is conceivable that they may seek compensation through litigation.
Professional Indemnity Basics Explained
Professional Indemnity cover is fundamentally different from general indemnity cover. Most general indemnity policies will only protect clients against property damage and bodily, personal, or advertising injury. In other words, general indemnity typically applies to damages of a physical nature, whereas professional indemnity claims deal with damages stemming from verbal communication.
Is Professional Indemnity Coverage Compulsory?
Depending on your occupation, professional indemnity may be a regulatory requirement. Professions such as solicitor, accountant, and insurance broker are just some of the jobs that are legally bound to have insurance protection in the event of a mistake.
The type of insurance can also effect the level of business you can attract. For example, some clients mandate that a professional obtain a minimum limit of indemnity cover before they will agree to a consultation. This is especially true of public sector organisations, many of whom demand a minimum of £5 million of professional indemnity cover from prospective consultants or contractors.
Consequently, those who do not secure adequate indemnity protection will miss out on potentially lucrative projects.
For other businesses, indemnity is used as a selling point for clients. Although some individuals have the impression that a large indemnity policy casts a business in a negative light, the opposite is true for most clients. Having indemnity cover provides an added layer of security for customers, as it provides a mechanism for recouping their funds were an error to occur.
Coverage for Short Term Contracts
Generally, a professional indemnity cover policy is on a claims made basis. This means that the policy must be in place in order for a client to make a claim. For this reason most businesses keep their policy in place throughout the year rather than establish a new policy for each short-term contract. This protects a business for the next contract as well as any future claims made by clients of the previous one.
For example, if a business were to end their policy at the conclusion of a contract and the client were to file a claim a month later, the business would not be protected by professional indemnity cover, despite having coverage at the time the mistake occurred. The business must be insured at the time of the claim.
Most insurers offer the ability to backdate your professional indemnity cover policy to cover previous consultations and advice, provided there are no impending claims from your clients. For example, if you provided advice to a client a month prior to applying for a policy, the policy could be backdated to include that work.
If the client were to subsequently file a claim, you would be protected despite not having indemnity insurance at the time of the original consultation.
Ensure You Are Properly Covered
As professional indemnity cover is handled on a claims-made basis, policies will only cover claims made while the policy is intact. In other words, if you end your policy once you shut down your business or retire, you will not be covered for claims made after you end your insurance, even if the damages were incurred prior to cancellation. As a result, you may want to enquire about extending the policy for a period after closing your business to ensure no future claims go uninsured.
The same issue applies to those who change insurers. As policies run on a claims made basis, you will either need to arrange for run-off cover from your old insurer or request retroactive cover from your new provider.
Keep Meticulous Records
It is important to remember that both your premium and your insurance coverage is based on the information you provide the insurer. The records you keep will paint a clearer picture for the insurer as to how best to serve your individual needs. As circumstances and demands are unique to every professional, this information can be vital to ensuring you receive comprehensive coverage and an honest evaluation of your risks.
This is true not only for when you sign up for a policy but throughout the duration of the coverage. Subtle changes in the way you operate your business can greatly affect the level and breadth of your insurance needs.
Moreover, while it may be difficult to avoid claims that result from error or negligence, keeping yourself organised and having records of the advice or services you provided can minimise claims that are spurious in nature. Being able to analyse documents and accurately retrace a situation will help you manage clients and deal with complaints promptly before a claim is made.
In the event a client does file a complaint, contact your insurer immediately to limit the damage. Many insurance providers have an expert claims team trained at resolving such situations with minimal harm to your business and your client relationships.
How Does PI Insurance Work?
Whether the damages are caused by a mistake or a spurious claim, the effect of a lawsuit on your reputation and business can be substantial without the proper insurance. Professional indemnity cover offers protection against these circumstances in exchange for an agreed upon premium. The cost and type of coverage is determined by a combination of risk assessment and cover specific to your business.
The first task for determining the cost and type of insurance for your business is risk assessment. An insurance underwriter will weigh a number of factors regarding the potential for risk, typically utilising the following checklist:
- The nature and operating procedures of your business
- The industry or service of your business
- Annual business income
- The total amount of indemnity cover you are seeking
- The excess amount
- The risk profile of your business
Given that no two businesses are the same, insurance quotes can vary significantly from provider to provider. Some underwriters may assign higher values of risk to certain aspects of your business than others. Generally, both the excess and the premium will fluctuate depending on how much risk an insurer is assuming. As with any product, it is incumbent upon the consumer to shop around and find a policy that is both financially palatable and comprehensive in terms of cover.
What PI Insurance Covers
In addition to price fluctuation, each provider may also have differing levels of cover depending on your business. Generally, however, a standard policy will cover you for the following infractions:
- Damages resulting from negligence, omission, error
- Breach of contract
- Downloading of computer viruses to unwitting third parties
- Fraudulent or criminal acts performed by an employee
- Negligence wrought by consultants, contractors, or individuals working on your behalf
- Unintentional breach of confidentiality, including the use or deliverance of information, patents, and trade secrets
- Intellectual Property, such as infringement of copyright or passing proprietary data as your own
- Libel or slander
- Loss of documents or data
- Retroactive cover for services rendered from the beginning of the policy
Be sure to contact your insurer as promptly as possible when confronted with a claim. Often times an insurer can take steps to fix the problem before it exacerbates into a much larger claim. It is also crucial that you read the small print and understand precisely what a professional indemnity cover provider will cover before agreeing to a policy. If you have any concerns about a specific situation, confirm with the insurer that you will be protected should a client file a claim.
What It Does Not Cover
With any lawsuit, there is the unaccountable damage caused by loss of reputation and future business. Typically, professional indemnity cover does not protect you or provide compensation for these losses. Depending on the provider, there may also be an excess of approximately £250 for each claim. Moreover, each insurer may have their own list of exemptions and exclusions. Before choosing a policy, verify you have gone over these three steps:
- Obtain a list of all exclusions on a policy and confirm both you and your clients are comfortable with each.
- Find out the level of cover your clients expect. For example, some companies will offer indemnity cover ranging from £50,000 to £5 million, and it is important to choose a policy that will provide adequate protection without being superfluous.
- Confirm that the policy includes coverage for all legal costs and expenses.
Despite the fact that professional indemnity cover protects against mistakes, negligence and similar incidents, it is important to bear in mind your responsibilities as a consumer. For instance, you must make an effort to disclose all information and material requested by an insurance provider.
Failure to do so can result in the invalidation of your policy. Be aware of the terms and conditions applicable to your policy, and follow the exact procedures listed when making a claim. Some insurers require prompt notification in the event of a mishap that may lead to a claim. Lastly, as with any insurance product, you are required to take reasonable measures to attenuate the chance of any loss.
Who Needs This Kind of Insurance?
Anyone involved in the sale and dispensary of advice, knowledge or skills are candidates for professional indemnity cover. Professions notable for utilising the service include financial advisors, accountants, insurance brokers, public relations consultants, marketers, mortgage intermediaries, designers, publicists, solicitors, and builders.
Financial advisors and brokers are the most obvious example due to the nature of their position. Brokers must advise clients on where to put their investments in what may be a volatile market. Consequently, the opportunity for negligence or perceived malfeasance is common.
In addition to advice, anyone involved in the handling and analysing of confidential data should obtain professional indemnity cover. Legal firms not only must provide advice to clients but are often entrusted with sensitive information with regard to a particular case. Professional indemnity cover protects the firm in the event of a leak. Other common occupations associated with indemnity cover include:
- Estate Agents
- IT Consultants
For instance, if an architect were to make an error in the planning for a construction project, it could result in significant losses should the mistake not be discovered in time. If the building work is already underway, the client will suffer damages not only for the demolition, rebuilding, and wasted materials involved in the project, but also for the loss of revenue caused by the delay in opening the building. As the architect would be solely liable for these costs, the amount can be staggering.
Journalists, meanwhile, can be sued for libel or making incorrect statements in the press. With the advent of social media, it is very easy for individuals to slander clients or misrepresent the company they work for. Even employees who regularly work with computers could accidentally release confidential information in the form of an email. In one such example, an email sent to the wrong address resulted in a £35,000 indemnity claim, for breach of confidentiality and various legal costs incurred by both parties.
Internet start-ups are another entity highly vulnerable to liability claims. Allegations regarding breach of confidentiality are quite common with online companies that keep an extensive database of various clients and users. Battles over copyright issues and trade secrets are another frequent source of litigation when many of these business involve themselves in partnerships and subcontracting work that can muddle proprietary ownership of software and programming code.
In order to protect themselves from such legal haranguing, many of these companies acquire high levels of professional indemnity cover. In fact, many of the directors and officers associated with young internet companies are often themselves the target of personal claims. This can be a pernicious threat to a new company funded primarily by venture capitalists and shareholders.
As the occupational paradigm gradually shifts away from traditional office and manufacturing jobs to freelance positions and consultation work, the need for professional indemnity protection has risen in parallel. Combined with the gradual increase of litigation in modern society, it becomes imperative for professionals who provide knowledge, skills, and advice to protect their business in the event a client files a claim.
Having the right coverage can not only recoup monetary damages caused by an error, but also mitigate the effect by helping to fix the issue before the client seeks larger compensation.
However, it would be wrong to assume that professional indemnity acts as a panacea for gross negligence or a licence to throw caution and documents to the wind. There are a variety of exclusions with any professional indemnity policy, and failure to follow the proper procedures when dealing with a claim can result in the voiding of your insurance.
More importantly, even with financial protection from a lawsuit, your business must still endure the damage to your reputation incurred by the mistake. Ultimately, it behoves every professional to not only protect themselves from the worst case scenario, but take the precautionary measures to ensure it never happens.