Nobody wants to lose their career, money and livelihood. Or have their reputation ruined. So business people opt for Professional Indemnity Insurance to protect their assets. But what is it exactly and do you as a professional need such an insurance? Professional Indemnity Insurance explained.
As a business-owner or professional the last thing you need is a legal battle waged against you which could leave you financially debilitated and your reputation in tatters. Indemnity Insurance, or Professional Indemnity Insurance, is a risk-management strategy to protect against such undesirable scenarios.
‘Indemnity’ simply means compensation or reimbursement. To be indemnified is to compensate for loss, injury or damage to a third party as a result of a mistake or negligent act in a professional capacity. This is the general definition of professional indemnity insurance in the UK.
Most of us are accustomed to the way that home, travel or motor insurance works, but professional indemnity insurance differs; it functions on a ‘claims made’ rather than ‘claims occurred’ basis. This means that when a claim is received the insurer in place at the time of notification will respond, rather than the insurer covering at the time the malpractice took place.
The best way to approach this system is to notify your insurance provider immediately when you become aware of an allegation against you, especially if you think it has the potential to lead to a legal enquiry. That way you reduce the risk of being unprotected when the allegation becomes anything serious, and that might require legal representation. The ‘retroactive liability date’ is the date from which indemnity cover begins; negligent incidents that occur after this date are covered.
Indemnity insurance covers the policy-holder for the cost of claims made against them – or at least for a portion of the costs depending on the limiting amount of the policy. The most common claims made are those alleging professional negligence, (gross) misconduct, breach of confidentiality or copyright infringement. Professional indemnity insurance can also cover for loss of sensitive information, data or documents, defamation, or the loss of goods or money for which you are responsible.
When one of these instances occurs, and a client can prove and quantify loss of business, income, profit or clientèle, the professional who provided the service or advice can claim on their indemnity insurance to cover the legal fees and compensation value.
Indemnity insurance is aimed at business-owners and professionals whose work involves providing a service or giving advice which could later be held accountable for loss or damage to a paying client.
Some professions are required by law to have an indemnity policy. For example, in the UK, solicitors must legally be covered for a minimum of £2-3 million for any single claim made against them and for the full duration of their employment.
Other industries have less strict legally-enforced policies, but are advised to take out an indemnity policy to protect themselves from the chance of a financially debilitating or plainly unaffordable claim being brought against them.
“No matter how large or small a business is, without professional indemnity cover your financial position could be left vulnerable if a claim is brought against you.” (source)
For businesses that conduct contract work, and so compete to win contracts, having professional indemnity insurance is a particularly attractive attribute to potential clients. Those without a comprehensive policy, or without one at all, run the risk of losing prospective clients to those with the safer option of an indemnity protection policy.
Other industries that should consider taking out a professional indemnity insurance policy are those who provide medical advice or practice. This includes but is not limited to: masseurs, physiotherapists, osteopaths, homeopaths and other alternative and traditional practitioners. As well as teachers, including dance instructors, personal trainers and music teachers; estate agents and landlords; media and design professionals and architects, engineers and accountants.
Run-off cover safeguards the policy-holder against claims that are made after a business closes or ceases to operate, when the insured persons are between policies or when a professional is retired. Run-off cover is important because after cessation there is still a chance that a previous client could make allegations about negative repercussions from work conducted years before.
Some errors or omissions are not immediately evident, and in some cases the consequence of errors does not become apparent until years later; run-off insurance will protect the beneficiary from such eventualities.
Run-off cover usually lasts for up to 6 years subsequent to the standard cover, as this is the legal limit for making a claim against a professional whose work is deemed to have caused loss, damage or injury to a third party. It is generally considered that most repercussions would have come to light within this 6 year period.
It is important to note that run-off cover only protects for the date up to the end of the standard indemnity policy; it is not a new policy protecting for an extended period of time.
More than 40% of claims made on professional indemnity insurance in the UK are notified more than three years after the alleged omission. Hence why run-off protection is so important for both client security and peace of mind for those whose prior professional performance could be held accountable for more recent losses to a previous client.
There isn’t a standard costing structure for insurance policies, nor run-off cover, though it is commonplace that a run-off insurance policy will cost the same as the previous year’s standard indemnity cover for the first year. It will lower incrementally year-by-year thereafter. The total cost for the 6 years run-off will usually amount to approximately 300% of the premium applicable to the last year of standard cover.
The reason the cost of run-off cover usually decreases yearly is because it is factored in that the likelihood of a claim being brought against the insured becomes less likely after the professional has ceased trading for a few years.