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 out because of you
For example, an architect might face a claim if the costs of a building project overrun because of problems with the design.
Professional negligence or 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, 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 use professional indemnity insurance include management and IT consultancies, estate agents and property consultants, surveyors, engineers and creative service 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.
How much insurance cover?
Your professional body or regulator may specify a minimum level of insurance cover that you're required to have. For example, solicitors need minimum cover 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 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.
As well as ensuring that you have enough cover, you should think about what level of 'excess' you're prepared to pay - how much you'll have to contribute if a claim against you is successful.
Choosing 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, offer much broader protection. For example, this might include claims where you've lost client documents, disclosed confidential information or infringed intellectual property. You need to check what types of claim are excluded.
You should 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 help the insurance covers. For example, some policies include cover towards the cost of professional body disciplinary hearings.
If you switch insurer, make sure that your new policy is fully 'retroactive' - covering any claims based on work you did before the start date of the new insurance policy.
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. By contrast, a cosmetic surgeon's insurance premium would be likely to be tens of thousands of pounds.
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.