Whether you’re a business owner, consultant, or independent professional, offering services or advice comes with inherent risks. Mistakes, oversights, or even unintentional breaches of confidentiality can lead to costly legal claims from clients. This is where professional indemnity insurance steps in. PI protects you from financial ruin and reputational damage in the face of legal claims or allegations.
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.
Is Professional Indemnity Insurance Mandatory?
While professional indemnity insurance is not legally mandatory in all cases, certain professions and associations may require it. For example, architects, accountants, lawyers, and engineers in the UK are typically mandated to have professional indemnity insurance specific to their field. However, even if not compelled by law, obtaining such insurance is strongly advised, particularly for professions prone to errors or those dealing with sensitive client information.
While professional indemnity insurance isn’t always legally required, certain professions and associations may insist on it. For instance, nurses, physiotherapists, architects, accountants, lawyers, and engineers in the UK typically need specific professional indemnity insurance. Even if it’s not a legal must, getting this insurance is strongly recommended, especially for jobs where mistakes can happen or where sensitive client information is handled.
Professions with regulatory bodies that demand professional indemnity insurance as part of their membership criteria include the Institute of Chartered Accountants in England and Wales (ICAEW) and the Association of Chartered Certified Accountants (ACCA), the Law Society of England and Wales, the Royal Institution of Chartered Surveyors (RICS, the Financial Conduct Authority (FCA), and the National Association of Estate Agents (NAEA).
In addition to regulatory requirements, clients may ask for professional indemnity insurance before doing business with you, no matter what your profession is. This is becoming more common, especially for important or risky projects. Lastly, claims management companies (CMCs) that handle personal injury claims need to have professional indemnity insurance, as they are regulated.
How Professional Indemnity Insurance Works
Professional indemnity insurance is a type of liability insurance designed to protect professionals and their businesses from bearing the full cost of defending against a negligence claim made by a client, and damages awarded in such a civil lawsuit.
Professional indemnity insurance typically covers legal costs and expenses incurred in your defense, as well as any damages or costs that may be awarded if you’re found to be legally liable for negligence, errors, omissions, or breaches of professional duty in the course of your work. PI insurance policies have limits, which can be per claim and aggregate. The per claim limit is the maximum amount the insurer will pay for any one claim, while the aggregate limit is the total amount the insurer will pay during the policy period, regardless of the number of claims.
Some policies offer tail coverage, also known as extended reporting period coverage, which allows you to report claims after the policy has expired. The retroactive date is the date from which you are covered for work done in the past. Claims arising from work done before this date may not be covered. However, generally, professional indemnity insurance is based on “claims-made” policies, meaning they only cover claims made during the policy period, not for incidents that happened before or after.
The payments made to the insurance company for the coverage are called premiums, while deductibles are the amount you are responsible for paying before the insurance coverage kicks in. Higher deductibles usually result in lower premiums.
If a client accuses you of negligence or any covered wrongdoing, you would typically notify your insurer as soon as possible. The insurer would then investigate the claim, provide legal representation if necessary, and negotiate settlements or defend you in court, depending on the circumstances.
It’s important to be aware of what is not covered by your policy (exclusions). Common exclusions include intentional wrongdoing, criminal acts, fraud, and certain types of contractual disputes.
What Does Professional Indemnity Insurance Cover in UK?
Professional indemnity insurance covers different things in the United Kingdom, such as:
- Professional negligence: Claims alleging errors or omissions in your services.
- Breach of confidentiality: Unintentional disclosure of client information.
- Defamation or libel: Accidental damage to someone’s reputation through your work.
- Loss of data or documents: Responsible for client data loss.
- Contractual disputes: Issues arising from contracts you drafted or signed.
Professional Indemnity Insurance Claims Process
To file for professional indemnity insurance claims, you need to follow a few steps. First, let your insurance company know as soon as you think there might be a claim against you. Then, share all the details with them so they can figure out what to do. They might try to settle the issue without going to court to save time and money. But if it comes to it, the insurance company will get a lawyer to represent you in court.
Run-off Cover for Professional Indemnity Insurance
Run-off cover, also known as run-off insurance or run-off protection, is a type of insurance policy that provides coverage for claims made against a professional or business after they have ceased operations, discontinued a particular line of business, or retired. It’s like an extension of your standard professional indemnity insurance, which typically covers claims made while the policy is active, even if the claim arises from work done in the past.
When a business or professional entity closes down or stops offering a particular service, there’s still a risk that claims could arise from past activities. Run-off cover helps mitigate this risk by providing insurance protection specifically for claims that arise after the cessation of operations or the discontinuation of a particular service. For example, a law firm may purchase run-off cover to protect against future claims that may arise from past legal services provided, even after the firm has closed down.
For example, an architect might be sued for negligence several years after designing a building, if structural problems come to light. Run-off cover would protect the architect from the financial costs of defending themselves and any compensation they might be ordered to pay.
Run-off cover is very important for businesses and individuals in certain professions like architects, engineers, accountants, lawyers, surveyors, financial advisors, and consultants. These are professions where there’s a high chance that claims might come up long after the work was finished. It usually includes covering legal fees, compensating claimants, and other related costs like expert witness fees. The duration of run-off cover can differ based on the insurance company and the profession. Normally, it lasts from 3 to 10 years after the person stops working or retires.
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.
This type of insurance is important because it helps businesses and professionals manage their long-term liabilities and financial risks, ensuring that they are still protected against potential claims even after they have stopped operating.
Professional Indemnity Insurers
The following are some professional indemnity insurers that you need to consider:
How Much is Professional Indemnity Insurance in the UK?
Professional indemnity insurance costs in the UK can vary significantly due to multiple factors. These include the industry in which the business operates (e.g., architects typically pay more than freelance writers), the coverage limits required, the size of the business, its claims’ history (e.g., having previous claims will likely increase your premium), and specific policyholder needs. Obtaining quotes and comparing rates is essential for securing the best coverage at competitive prices.
Generally, industries with higher risks, such as construction or finance, generally face higher premiums. Larger businesses with more significant turnovers and more employees typically pay more due to their increased exposure to potential liabilities. Additionally, a history of previous claims can significantly raise insurance costs. The level of cover also plays a crucial role, with higher indemnity limits resulting in higher premiums. Furthermore, the excess and deductible amounts chosen can impact the premium, with higher excess amounts leading to lower premiums but potentially higher upfront costs in the event of a claim. Finally, run-off cover costs are typically structured to decrease incrementally over time, reflecting the diminishing likelihood of claims as years pass.
Drawing from our recent research, specific examples illustrate the potential costs of professional indemnity insurance under various scenarios. For a small marketing agency seeking a £1 million indemnity limit and a £2,500 excess could expect to pay around £50 to £100 per month. In contrast, a large construction company requiring a £5 million indemnity limit and a £10,000 excess might face considerably higher premiums, likely totaling several thousand pounds per month. An architect with a £5 million cover, £500,000 turnover, and a minor claim from 3 years ago might pay £2,000-£3,000 per year.
Here are some specific examples based on information from reputable UK insurance providers. Markel UK offers insurance starting at £74 a year. It could be good for freelancers who do low-risk work. Additionally, Hiscox has insurance starting at £8 a month, which is about £96 a year. This might be good for small businesses with medium risk. Moreover, AXA UK provides insurance starting at £67 a year. This could work for someone working alone or a small business with specific needs. Finally, MoneySuperMarket‘s information shows that about 51% of customers paid up to £8.76 a month for regular insurance between October and December 2023. This is about £105 a year.
It’s important to get quotes from different places to find the best insurance for the best price. You can use comparison websites like MoneySuperMarket, Confused.com, and Compare the Market to see quotes from lots of different insurance companies all at once. You can also go directly to insurance company websites to get quotes from them because some insurance companies are on comparison websites, so it’s good to check directly too. If you’re not sure where to start, or you need help understanding your options, insurance brokers can help. They know a lot about different types of insurance and can help you find the right coverage for you. They can also try to negotiate better prices for you.