Member Article

What does professional indemnity insurance cover?

Professional indemnity insurance covers lawsuits brought by clients against professionals who may have given negligent advice or service. This article will explain what professional indemnity insurance covers, how much a business might need, and what costs they might pay for cover. Read this to learn more about professional indemnity insurance before you buy a policy for yourself or your business.

What is professional indemnity insurance definition?

According to NimbleFins, professional indemnity insurance is a type of business insurance that primarily protects professionals from being sued for giving poor or negligent advice or service to their clients. It protects against a financial loss that the client might incur as a result of this bad professional advice or service.

Professional indemnity insurance pays for legal costs incurred to defend a claim of professional negligence and it also covers compensation that the business is found liable to pay the client.

Any person or business who is paid for providing professional advice or service to a client should consider professional indemnity insurance. Not having a policy in place puts the professional or business at risk of being sued for potentially substantial amounts of money. Without a policy, the individual or business could not only have to pay the legal fees but also any compensatory damages if the business is found liable for the customer’s financial loss.

How much professional indemnity insurance should I have?

The amount of professional indemnity insurance a business should have depends on many factors and will differ depending on the type of work your business is engaged in. Generally speaking, businesses with larger contracts and whose work has the potential to cause significant financial loss to a client will need higher limits. The limit should be enough to cover all eventualities.

Some professionals will have to meet certain requirements as to minimum professional liability insurance limits if they’re a member of a professional trade organization. For example, chartered accountants must adhere to certain calculations that determine how much professional indemnity insurance a member should have. These calculations vary from one organization to the next. For an accountant, the annual fee income and largest fee from one client in a year are factors in this calculation. The higher the fees, the more professional liability insurance an accountant needs.

For example, The Association of Chartered Certified Accountants (ACCA) requires a minimum limit of indemnity on PII for accountants in respect of each and every claim of at least £50,000, but requirements can be £1 million or more (e.g., 25 times the largest fee during the previous accounting year).

There may be requirements in aggregate and for any given claim. The “aggregate” limit is the most a policy will pay in a policy year. The “any given claim” limit is the most a policy will pay for a single occurrence. This can also be referred to as an “each and every claim” limit.

By way of another example, the Architecture Registration Board recommends that architects have a minimum PI coverage limit of £250,000 for each and every claim. In the end, a specialist insurance provider can walk you through the decision to help you decide how much cover you need.

How much does professional indemnity insurance cost?

Public liability costs are highly variable, with some companies paying under £100 a year and other small businesses paying tens of thousands of pounds a year. So it’s impossible to give any sort of guidance about average professional indemnity costs and have this be a reliable indicator of what any given business will need to pay for cover.

The only way to find out how much professional indemnity insurance will cost for a specific business is to compare quotes in the marketplace. This is also very important to do because premiums can vary from one underwriter to the next. While premiums for any type of business insurance can vary by insurer, this is especially true for professional indemnity.

Why? Well, underwriters must manage the risk of their book. And this can mean spreading out risk across different industries or limiting exposure to certain industries. An underwriter who is generally happy to insure one specific type of business might decide that after a busy month they have enough of that type of business on their books, and might not want any more. In that case, they might increase premiums on new quote requests to discourage new business.

Or if a certain industry has a particularly bad spell then premiums for that industry will rise accordingly. For example, as a result of the Grenfell disaster, professional indemnity premiums for architects have risen across the board. It’s been reported that some small architecture firms with £1 million of turnover are now paying north of £50,000 a year for professional indemnity cover.

In summary

Professional indemnity insurance may be the most expensive type of insurance your business needs to buy, but it is critical for almost any business that is paid for providing professional advice or service to their clients. This includes individuals working in a freelance or self-employed capacity as well. To cater to this market, there have recently been some new products introduced to the UK PI insurance market for freelancers.

This was posted in Bdaily's Members' News section by Erin Yurday .