What is professional indemnity insurance?
Professional Indemnity insurance protects your business against potential claims for professional mistakes, errors and/or omissions. It covers legal costs and expenses incurred in your defense, as well as any damages or costs awarded. if you are alleged to have provided inadequate advice, service or design that cause your client to lose money.
This can include claims of:
Negligence
Infringement of Intellectual Property Rights
Defamation
Breach of Confidentiality
PI Insurance allows professionals to carry out their work with greater confidence and peace of mind
If you are alleged to have provided inadequate advice, services or designs to a client, Professional Indemnity Insurance provides cover for the legal costs and expenses in defending the claim, as well as compensation payable to your client to rectify the mistake.
The history of PI insurance
This type of insurance was created to provide much needed financial protection against the risks and personal losses to which professionals were heavily exposed. The origins of professional indemnity insurance go back to London in the 1700s. At that time, the established professions such as accountants, solicitors and architects traded with ‘unlimited liability’ as a guarantee of the quality of their work.
When they made a mistake, they would pay any remedial compensation to their client from their own pockets, limited only by the value of their assets. As such, they could literally ‘lose the shirt off their back’ if their mistake was significant enough. So the creation of insurance to protect against these losses was a much-needed solution.
Nowadays, the increasing reliance of businesses on the contracted services provided by many occupations has vastly increased the scope of the term ‘professional’, and a professional is regarded as any person or firm offering specialist advice or services. The risks are as significant as ever and mistakes can still lose a professional their business and their reputation without adequate professional indemnity insurance.
How much does professional indemnity insurance cost?
The cost of cover will depend on the type of profession, annual turnover, the claims history etc. Rates for this insurance are generally based on a percentage fee income or annual turnover, depending on the usual risk factors and market competition. But rates can also be higher or lower than this.
Minimum premiums will also apply which will vary between insurers. The ‘minimum premium’ is the insurance company’s starting point for insuring a risk, and they can vary significantly between companies.
Insurance premium tax of 12% is also payable on insurance premiums, but premiums are not subject to VAT.
The premium calculation for a professional indemnity policy varies by profession, as some professions are much higher risk than others. Like a car insurance policy, there are many factors that go into the cost of the policy, not just the amount of cover or limit of indemnity required.
The size of a business, its turnover, and its professional activities is a crucial part of any calculation that is made, along with any claims that have already been made. The greater the exposure to a potential claim, the more cost will be involved in the purchase of any insurance.
Is professional indemnity insurance a legal requirement?
It is not a legal requirement, but most professional institutes and associations require their members to have some form of professional indemnity insurance and regulate this through their rules and regulations. To not have the insurance is usually a serious disciplinary offence which can result in a firm being fined or closed down by their regulator.
In many unregulated services such as IT and Tech, professional indemnity insurance is not a regulatory requirement. Nonetheless, those professionals who are not obliged to have this type of insurance are still wise to carry it. Management, business and marketing consultants are usually not required to have professional indemnity, but frequently still have it to protect themselves from the potential liability of legal fees or compensation payments.
Many large companies and government departments will also insist that any service provider that they work with should carry PI insurance and will require evidence.
Other occupations that often take out cover against their professional services include IT professionals, recruitment consultants, graphic and interior designers, personal trainers, instructors, teachers and private tutors. However, the list is much more diverse and extensive than just these professions.
What level of indemnity do I need?
There are no set rules about the Limit of Professional Indemnity Insurance cover that you should buy, unless you are contractually obliged to buy a certain limit.
It comes down to the size of the contracts or projects to be covered under the policy and if the worst came to the worst – What would your defense costs be, what is the maximum compensation that might be awarded against you?
What is a retroactive date?
If a Professional Indemnity insurance policy has a Retroactive Date it means no cover is provided for any work, contracts or commissions undertaken prior to the specified date, even if the claim is first made during you current policy period.
If however there is no Retroactive Date then cover is provided for all past work, contracts and commissions that you have undertaken.
What is the difference between “Any One Claim” and an ”Aggregate Policy” ?
“Any One claim” and “Aggregate” refer to the basis of cover on a Professional Indemnity Policy.
An “Any One claim“ policy provides cover up to the full limit for each individual claim made in the period of insurance, whereas an “Aggregate “ policy provides cover up to the full limit of all claims made in the period of insurance