What is professional indemnity insurance?
Every business wants happy clients. Do a good job for them and you will get repeat business, generate referrals and build a great reputation. But sometimes things do not go to plan.
If you give professional advice, you may face claims from clients if they think it was not up to scratch and has had a negative impact on their finances and their brand. Professional indemnity insurance can help meet the costs of defending and settling these claims.
Who needs professional indemnity insurance?
Professional indemnity insurance is not a legal requirement, but many professional bodies and/or sector regulators stipulate that practitioners must have cover in place.
For example, the Solicitors Regulation Authority sets out minimum insurance requirements, while accountancy bodies such as the Institute of Chartered Accountants in England and Wales also requires members to have cover.
But the need for professional indemnity is wider than the traditional professions. It could extend to virtually every person or business giving advice to clients.
This includes life coaches, tutors and health practitioners, as well as web developers, graphic designers and management consultants. It also includes people who work as freelancers or sole traders.
The Chartered Insurance Institute sums up the need for professional indemnity insurance. It says: “When professional people offer professional advice, they must exercise an adequate degree of skill and have enough information to make that advice reasonably safe to give. If they fail to do so they can be held liable for any loss or damage that results.”
In these circumstances, a professional indemnity insurance policy can help.
What does professional indemnity insurance cover?
Professional indemnity insurance can help pay for the legal costs of defending and settling a claim as well as for the costs of putting things right.
Policies vary, but typically, professional indemnity insurance provides cover for:
- Professional negligence – e.g. you give inadequately prepared advice that leads to loss for the client or negatively affects their reputation
- Errors and omissions – e.g. you include factually incorrect information in your advice
- Defamation – e.g. you make an untrue statement regarding a client
- Breach of confidence – e.g. you share private client information without consent
- Breach of copyright – e.g. your work infringes existing copyrights, trademarks or intellectual property
- Lost or damaged documents – e.g. you misplace or damage physical or electronic paperwork in your care
Even if you have done nothing wrong, the cost of defending claims against you can be expensive. It is also the case that it is almost impossible to eradicate mistakes and unintentional slips while discharging your professional responsibilities.
Professional indemnity insurance is there to ensure these situations are resolved quickly and effectively and that the financial repercussions do not cripple your business.
How much cover do you need?
If you are a member of a professional association or fall under a regulator with specific professional indemnity requirements, then you should make sure your cover is compliant.
In many cases, clients will also demand you have cover in place and so your policy should meet the terms set out in any contractual agreement and/or commercial arrangements.
Where you do not have to meet set requirements, think about the value of the contracts you work on and the potential there is for a mistake to cause financial loss or reputational damage to a client.
How big might that loss be? How much would it cost to put right? What sort of compensation would they expect? Asking these sorts of questions will let you get an idea of how much cover you will need if things go wrong.
So too, will speaking to your professional advisers including insurance brokers who will be able to guide you in setting your cover at an appropriate level.
Past, present and future claims
Professional indemnity insurance claims might not arise until a few years after the contested work was completed. Cover is usually offered on a “claims-made” basis, which means your insurance covers claims brought against you whilst the policy is in force.
For example, a client may make a claim against you in 2021 for work done in 2018. It is the 2021 policy that will cover you.
If you are retiring or changing professions, you should consider how you will protect yourself against claims that might be made against you in the future. Many of the professional organisations will require their members to maintain run-off cover for up to 6 years after ceasing to trade. A run-off policy will provide cover for claims that arise after you have stopped working or changed jobs.
If you are changing your insurer, you also need to make sure claims from past work remain covered.
The Association of British Insurers says: “If you are changing insurer, a run-off policy will protect you against new claims for incidents that occurred when you were with your previous insurer. Alternatively, your new insurer may agree to cover you for claims relating to prior incidents.
“Check if your new insurer covers you for claims relating to previous incidents or ask about buying a run-off policy.”
You can buy professional indemnity direct from an insurer or through an insurance broker. Both will be able to give you information about your specific requirements to ensure you get the cover that meets your needs effectively.
Edward Murray is a financial journalist who has written for The Daily Telegraph, The Guardian, The Daily Mail, The Scotsman and Scotland on Sunday