Professional indemnity insurance explained – a simple guide to PI insurance
As a business owner, you want to protect your business in as many ways as you can. Professional indemnity insurance, also known as PI insurance, covers you should a client or customer claim that your service, advice or design is inadequate, is not as expected or resulted in financial loss for the client. It would cover any legal costs and other expenses incurred in your defence, as well as damages or costs that may be awarded to your client.
Do I need professional indemnity insurance?
Many professions need to have professional indemnity insurance as part of their respective industry body’s regulatory requirements. These include:
- Chartered surveyors
- Some therapists
However, even if you are not obliged to have PI insurance, without it, you could be liable for thousands of pounds of legal fees and compensation payments, not to mention lost income from the time spent defending any allegation.
You are likely to need professional indemnity insurance if:
- You provide advice or professional services to your clients (including consulting or contracting)
- You provide designs to your clients (such as working as an architect or design engineer)
- You want to protect against allegations of mistakes or negligence in work you have undertaken for your client
- You work as a contractor, consultant, freelancer or self-employed professional, and your client has requested you arrange professional indemnity insurance in order to undertake a contract
- Your industry association/regulatory body requires you to have it.
Professions that might need professional indemnity insurance include (but are not limited to):
- Management and business consultants such as marketing consultants, training consultants and education consultants
- IT professionals including IT contractors, consultants, programmers and developers
- Technical and engineers contractors including CAD designers, project engineers and offshore oil and gas engineers
- Recruitment agencies and recruitment consultants
- Designers such as web designers, graphic designers and interior designers
- Fitness professionals including personal trainers, dance teachers and yoga instructors
- Teachers and tutors including private tutors
What does professional indemnity insurance cover?
As discussed above, and put simply, professional indemnity insurance provides financial protection against claims of loss or damage made by clients or third parties, arising from your professional services, instructions or advice. This can include loss or damage caused by professional negligence, for example making a mistake in a piece of work or giving your client poor advice.
Professional indemnity insurance can also cover:
- Unintentional breach of copyright – for example if you used someone’s picture in your advertising without their permission
- Defamation and libel – such as making a claim about a competitor that is untrue
- Unintentional breach of confidentiality – this could include sharing confidential client information without their consent
- Loss of documents or data
- Loss of money or goods that you are responsible for
When a claim of this kind is made against you, professional indemnity insurance can cover your legal costs and expenses, incurred while defending the claim. It can also cover compensation costs awarded to the client or third party, if you are found to be responsible.
What doesn’t professional indemnity insurance cover?
While PI insurance covers quite a few circumstances, there are also a few scenarios where you may not be covered.
Generally, PI insurance doesn’t cover:
- Fines and penalties
- Any loss to your business that’s caused by mould, pollution or asbestos
- Injury to an employee
- Injury or loss in a joint venture (only your products/services would be covered by your insurance, and not the products or services of a partner)
- Circumstances that existed prior to when your cover started.
What is an example of a PI insurance claim?
A graphic designer was briefed by their client to provide price tags that would fit around the stem of Christmas trees. The tags would need to withstand exposure to the elements and stay fitted to the tree while it grew. However, the tags did not survive the test of time: the ink ran, rendering them useless to the client.
The client lost money due to this oversight and took legal action against the graphic designer for professional negligence. The graphic designer's professional indemnity insurance policy covered their legal costs and compensation payments to the client, a total cost of over £3,000. The client didn't pursue their claim for the full cost of the labels. If they had, the claim could have cost as much as £100,000.
How much does professional indemnity insurance cost?
The cost of professional indemnity insurance can vary due to a number of factors, such as:
- the amount of cover you require
- the activities you are undertaking
- the income your business generates.
Markel Direct offers PI insurance cover from £8 a month (or £74 a year) for a wide range of professionals. Still confused by professional indemnity insurance? Call us on 0800 640 6600. We are professional indemnity experts and will be happy to help with any questions you might have.
How to make a claim on professional indemnity insurance
Knowing how and when to make a professional indemnity insurance claim can be tricky. Generally, you should claim when a client or customer makes a complaint that cannot easily be rectified or remedied. In some cases, a refund or changes to the service may be what’s needed. However, if the client still isn’t happy, this is when you should make a claim.
To make a claim, you should first contact either your broker or your insurer directly. If you need advice, they will be the best point of contact, and may be able to provide advice that means you don’t need to claim, or they can advise you of your next steps. You should also reread your policy document to ensure you’re covered. If you're unsure of whether a situation should be notified, it's best to let your insurer or broker know and they will respond accordingly.
From here, you can fill out a claim form that provides your insurer with all the information they need to get the claim under way. They may require proof or evidence, such as emails between you and the client, to demonstrate what the problem is and why you’re claiming on your PI insurance.
Once the form is complete, your insurance provider will keep you up to date every step of the way, letting you know of updates and information regarding your claim.
Professional indemnity insurance jargon
If you’re confused about the terminology associated with professional indemnity insurance, we explain some of the jargon below.
What's the difference between an '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 for all claims made in the period of insurance.
To put this into context, if two £75,000 claims are made against a £100,000 any one claim professional indemnity policy, the insurer would cover the costs of both claims, as they are both under the £100,000 limit.
If two £75,000 claims are made against a £100,000 aggregate professional indemnity policy, the insurer would only pay up to the £100,000 limit. As the claims total £150,000, the remaining £50,000 would need to be covered by other means.
Although any one claim is generally considered the more comprehensive option, the basis of cover varies from insurer to insurer depending on your business activity.
What does 'claims made' mean?
A 'claims made' policy provides cover for claims that are made and notified to the insurer during the period of insurance.
If your policy has a retroactive date exclusion, this means that the wrongful act (the alleged mistake, error or professional advice that has led to the claim) must have occurred after the date stated in your policy. Acts committed prior to this date will not be covered. If your policy does not have a retroactive date, it doesn't matter when the wrongful act occurred – you will still be covered by the policy. This application of retroactive dates vary by policy and insurer.
However, in either case, if the policy is cancelled or not renewed, cover will end and any subsequent claim – regardless of when the wrongful act occurred – would not be covered by that policy. As such, it's important to have professional indemnity insurance cover in place, even between contracts or work, to ensure your business is protected.
All Markel Direct professional indemnity insurance policies are on a 'claims made' basis. This contrasts with a 'claims occurring' policy which provides cover for claims which occur during the period of insurance. Professional indemnity policies are rarely, if ever, written on this basis. It is more commonly found with public liability and employer's liability policies.
What is 'run off' cover?
Run off cover insures against claims of professional negligence brought against you after your business has ceased trading. This could be, for example, if you have sold your business or closed it down. It is particularly important for retired business owners to consider. Without run off cover in place, they would have to fund the defence of the claim out of their own back pocket.
To get a quote for professional indemnity insurance in just 90 seconds, visit our online quote system here.
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