What is professional indemnity insurance?
If you're self employed, working either through a limited company or as a sole trader, professional indemnity (PI) is a useful legal cover. Every business has customers and, no matter how good your services are, sometimes customer relationships can sour.
Professional indemnity insurance will assist you legally and financially if your business is accused of negligence or a professional mistake by an unhappy client demanding a compensation.
Imagine a client is making financial demands and threatening you with legal action. With Suited professional indemnity cover in place, your legal costs associated with the claim (early advice or defence) and any possible compensation are covered.
Suited PI insurance also offers 'retroactive cover'. In other words the policy can extend to cover your past work.
For example your client contract says you must have professional indemnity insurance but you simply forgot to arrange it. It is possible to buy Suited PI insurance with a retroactive date provided you're not facing a claim situation when arranging cover.
Another situation when you might need Suited PI to cover your past work is when you're switching insurers. Customers often think that they don't need cover for past work because they were previously insured. That is not how professional indemnity works. If you wish to stay insured for the past, your current professional indemnity policy must include retroactive cover.
What does professional indemnity insurance cover?
The main purpose of professional indemnity insurance for self employed professionals is to cover financial losses suffered by your client due to professional negligence, errors, or omissions made by you during the provision of your professional services.
In addition the cover also provides legal defence. In other words you won't have to hire your own solicitor or pay for it. Your professional indemnity insurance will do that for you and pay for all the costs.
Customers often cancel their professional indemnity insurance when the costs are rising. This could be a very costly mistake.
If the cost of professional indemnity insurance goes up, it is because there have been more claims. This is typical during tough economic times and evermore important that you protect yourself.
Who needs professional indemnity insurance?
If you are in the business of providing your expertise and skill to solve your clients' problems, you should protect yourself with PI cover whether or not required by the contract.
Often self employed individuals ask: "Do I need professional indemnity insurance? Is it worth the spend?".
From time to time everyone has to deal with an upset client and while most conflicts get resolved amicably, you don’t want to leave yourself exposed to the costs of a possible claim.
Many self-employed and freelancers cancel their PI cover as soon as a client contract is fulfilled to save on the insurance premium. However, this could be a false economy. Sometimes it takes time to discover mistakes and a client may come after you years after you finished your contract with them.
Professional indemnity insurance works on a claims made basis. What that means is that if you don’t have PI insurance in place when the claim is made, you are not protected even if you had PI cover during the contract with the client.
Who can get professional indemnity insurance?
Any individual who provides advice or expertise to a third party should protect themselves with professional indemnity insurance.
Often it is mistakingly believed that this cover is only available to businesses or the self-employed. In fact anyone can buy PI cover for a specific range of professional activities.
For example a retired accountant who volunteers with a charity can buy professional indemnity insurance even though their services are unpaid.
Equally a freshly qualified graphic or interior designer who is offering services for free in order to build a portfolio can secure professional indemnity cover.
How much professional indemnity insurance do I need?
Usually the contract with your client is a good guide.
If you are receiving a contract from a client or an agency representing the client, check the liability/insurance section. Ask the other side if you can't find it. It is important that you understand what your liabilities would be, should something go wrong.
If you're presenting a contract to client, ensure you insert a limitation of liability clause. This is a basic approach to protect yourself from unlimited liability under the contract.
Certain professions do not insist on client contracts - counsellors, physiotherapists, software developers, and other 'solo' professionals.
In those situation you will need to take into account the level of responsibility you will have for the work delivered and any possible financial consequences as a result of your mistake.
For example if you are an a software developer who works under the supervision of someone else and you only deliver precisely scoped tasks signed off by your supervisor then the risk of being sued, unless you are negligent, is quite low. On the other hand an IT architect responsible for designing a complex solution for a financial institution is facing a much higher risk of a legal action if something doesn’t go to plan.
