What is professional indemnity insurance?
Professional indemnity insurance is a policy that safeguards individuals and companies against claims of professional negligence, errors, or omissions in their work. It covers legal costs and compensation claims made by clients or third parties.
Why is professional indemnity insurance important?
PI insurance is vital because it provides financial protection in case a client alleges that your work caused them financial harm. It can cover the costs of legal defence, settlements, or judgments, preventing significant financial losses.
How does professional indemnity insurance work?
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 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 be extended 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 it is more important that you protect yourself.
What does professional indemnity insurance not cover?
No insurance policy covers every scenario, and professional indemnity insurance is no exception. While it offers valuable protection, there are exclusions worth noting:
Breach of contract
Most professional indemnity policies exclude claims arising from a deliberate breach of contract. That said, insurers will sometimes cover your legal defence costs if a client falsely accuses you of breaching a contract—though compensation payments are typically not included.
Data breaches (GDPR)
Since the introduction of GDPR, businesses handling personal data face increased exposure to legal action. Something as simple as sending an email with personal information to the wrong recipient could result in a compensation claim. Most professional indemnity policies do not cover GDPR-related compensation, especially those resulting from a cyber incident, although insurers may contribute towards legal costs.
Willful or deliberate acts
If you knowingly act unlawfully or breach regulations, your professional indemnity insurance won’t cover you. For instance, if an architect proceeds with a project without the required local authority approval and is fined as a result, insurers are unlikely to accept the claim—especially if the breach was intentional.
Professional indemnity at Suited
Who needs professional indemnity insurance?
Professionals who provide advice, consultancy, or specialised services should consider professional indemnity insurance. This includes doctors, lawyers, architects, consultants, and IT professionals, among others.
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 when 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 finish your contract with them.
Professional indemnity insurance works on a claims-made basis. That means 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.
Is professional indemnity insurance required by law?
Professional indemnity insurance isn't a legal requirement. However, in some industries, it may be a requirement or a condition of professional licensing.
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 a 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 that 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 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 legal action if something doesn’t go to plan.
