Professional indemnity insurance

Reviewed by Ben Davis of Superscript

A professional adviser works confidently with a couple knowing she has professional indemnity insurance in place

If you provide advice or other professional services, there's always a risk that you could be sued if your client thinks they've lost money because of you

For example, say you were an architect. You may face a claim if the costs of a building project overran because of problems with your design.

Professional indemnity insurance helps protect you against claims like this. The insurance typically covers the costs of defending yourself and paying compensation if you lose the case.

Do you need professional indemnity insurance?

Many professionals are required to have professional indemnity insurance by their professional body or regulator. For example, qualified accountants, lawyers, financial advisers, GPs and doctors who work in private practice all need to have insurance.

Even if insurance isn't compulsory in your field of work, you may find that the clients you're after will only use advisers who have insurance, or that having insurance gives you a marketing edge. More broadly, you should consider taking out insurance cover if your business involves giving advice or providing designs or other professional services that your clients rely on.

Typical businesses that take out professional indemnity insurance include management and IT consultancies, estate agents and property consultants, surveyors, engineers and creative services such as designers.

Bear in mind that policies generally only cover claims made while the policy is in force. If you stop being in business and allow your insurance to lapse, you might still face claims based on work you did in the past. 'Run-off' insurance can provide cover for this. You should get run-off cover for at least six years, the normal limitation for negligence claims, but may want cover for longer.

It may also be possible to include retroactive cover when you take out insurance. This covers you for any unexpected professional indemnity claims relating to work carried out during a specific period before you took out your policy.

How much professional indemnity cover do I need?

Your professional body or regulator may specify a minimum level of insurance cover that you're required to have. For example, solicitors typically need a minimum of £2-3 million (depending on the type of law firm) while the Architects Registration Board sets a minimum of £250,000 for each claim.

Typically, you're also required to make sure that you have an 'adequate' level of insurance to cover the amount of any likely claims. Compensation payments are likely to reflect how much it would cost for the client to put things right. Claims can also include consequential losses - for example, if a client loses a substantial contract because of your advice. And of course legal expenses can be substantial, further adding to the client's costs.

As well as ensuring that you have enough cover, think about what level of 'excess' you're prepared to pay - how much you'll have to contribute each claim.

How to choose your professional indemnity insurance

You need to be clear what you want the policy to cover. Cheaper policies may only cover claims based on professional negligence, where the client has suffered because of your failure to live up to reasonable professional standards.

Other policies, on a ‘full civil liability’ basis, may offer much broader protection. The difference between ‘negligence based’ wording and a ‘full civil liability’ wording is that you don’t need to be found negligent in order for cover to apply. This means that the bar for claiming on your professional indemnity policy is much lower on the civil liability basis than the ‘negligence based’ wording. To make sure that you’re covered for your specific business activities, make sure to check the policy exclusions.

Make sure your insurance covers any claims made against your business, including claims based on the actions of your employees or business partners.

It's worth making sure you understand how claims will be dealt with and what kinds of legal assistance the insurance covers. For example, some policies exclude cover for the cost of professional body disciplinary hearings.

If you switch insurer, make sure you tell them about your retroactive date - this is the date that you first bought a professional indemnity policy. This is an important date and it makes sure that you are covered for any new claims that arise based on work you did since the retroactive date. Many insurers won't cover your work retroactively but some will cover your work retroactively as standard.

Professional indemnity insurance costs

The cost of insurance depends on the level of cover. Insurers will also take into account the type of work you do, how large your business is, any history of claims against your business and other risk factors. Full civil liability insurance will be more expensive than negligence only.

Minimal insurance, providing cover as low as £50,000, might cost as little as £100 a year for a low risk occupation. By contrast, a cosmetic surgeon's insurance premium would be likely to be tens of thousands of pounds, as a costly case is more likely to occur.

In some cases, you may be able to reduce your premiums by showing that you manage your risks well. For example, you might get an appropriate professional accreditation. Even when this doesn't lead to an immediate reduction in premiums, building up a track record of no claims will help.

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