Professional Indemnity Insurance

Running a business can feel as though you need eyes in the back of your head. There's so much to keep an eye on, and so many responsibilities to keep sight of – whether they are to your staff, your customers or your partners.

So it's hardly surprising that even the best-run businesses don't always get it right. On the occasions where you or your firm are accused of making a professional mistake, it's important to be sure that it won't cost you your business.

What is Professional Indemnity Insurance?

Professional indemnity (PI) insurance protects firms and individuals who may face claims of professional negligence from third parties. It covers the cost of legal fees and, if necessary, the cost of compensation.

PI is sometimes confused with public liability insurance. However, public liability policies exclude claims that involve advice or services given for a fee. So whereas arguably any business should consider taking out public liability insurance, only those whose work risks serious financial cost to their client should consider professional indemnity.

One particularly important aspect of PI is that it should be seen as a long-term commitment. The period of cover needs to include the time that any claim is made, which could be years after the initial mistake.

Therefore, when switching PI cover between insurers, it's important to check that the cover does not have a 'retroactive exclusion' – i.e. that it covers you for problems rooted before your current policy began, which subsequently come to light.

Who Needs Professional Indemnity Cover?

Professional indemnity cover is particularly relevant for companies and individuals that offer expert advice and professional services. For certain professions – law, accountancy and financial services – it's a legal requirement.

For other types of work, PI is often a condition of membership of professional institutions, or of a particular job contract. However, as mentioned earlier, the nature of the way that claims can arise means that it's important to remain covered during and after any period in which your work is undertaken. For many professionals, that means their whole working life.

And given the time lapse that can occur, many professionals purchase a "run-off" policy that will cover them for several years into their retirement.

How Much Does Professional Indemnity Insurance Cost?

The cost of cover is dictated by the potential impact of a mistake. That means the quote you receive will be closely based on the fees that you charge and the kind of work you do.

So even within professions, there is likely to be considerable variation. For example, a property surveyor who works mainly with individual homeowners is unlikely to need to indemnify themselves for sums as large as those who work with large commercial clients.

If you've been working in a profession for some time without insurance and decide to take up professional indemnity, you can expect to pay a higher premium to begin with. This will reflect the length of time that you have been unprotected from claims of negligence, which represents a higher risk for your insurer to take on.

Examples Of Where PI Cover May Help

Every firm is different, even within the same trade, so there's no catch-all answer to whether your business needs professional indemnity cover. That said, some trades are more likely to need it than others - IT contractors, accountants, property professionals and photographers are all at risk of a high-value negligence claim. We look at example scenarios where professional indemnity insurance would provide protection for four different trades.

Links:
Association of British Insurers (ABI)
Business insurance basics at BusinessLink

IT Contractors

IT contractors and consultants are among the most likely to seek professional indemnity insurance. The complexity of IT issues and the potential for mistakes to have knock-on effects means that it can be a litigious environment to work in.

For example, perhaps you have advised a firm to install a certain kind of software system. Later on, after your client has bought and attempted to install the software, it emerges that it is incompatible with the firm's existing hardware – a fact of which the firm believes you should have been aware.

Your client has wasted time and money on the new system, and makes a claim against you for negligence. Professional indemnity insurance would cover the cost of fighting the claim and paying any compensation awarded.

Accountants

The consequences of an error in financial services can be particularly severe. Take the case of an accountant who has failed to file their client's tax return in time. If the delay goes unnoticed, a business might conceivably run up thousands of pounds in interest charged on the outstanding tax bill.

Equally, if a bookkeeper is thought to have made errors in PAYE calculations, as with one claim that MORE TH>N BUSINESS has seen, the accumulated errors in tax receipts and potential penalty charges could be significant.

Property Professionals

When it comes to the housing market, there are several parallels between now and the early 90s. The last time the sector moved from a period of boom to bust, surveyors and estate agents found themselves in the firing line.

Faced with negative equity, some property owners questioned the original valuation of their homes. This resulted in an increase in claims against surveyors and estate agents, many of whom will have drawn on their professional indemnity insurance to protect them.

Even in the good times, those providing guidance on property should consider the consequences of missing an important detail or failing to deliver what's expected. This could concern a multitude of subjects. For instance, underwriters at MORE TH>N BUSINESS have seen a claim involving under-floor heating that allegedly failed to produce sufficient heat.

Photographers

When unique events rely on your performance on the day, the consequences of failing to deliver the goods may be serious.

A fashion photographer who loses the digital files from an expensive shoot may be sued by a magazine for the lost time of its models and staff. Meanwhile, a wedding photographer whose footage of the big day fails to live up to expectations will have to answer to the bride and groom.

In each case, professional indemnity cover would help to protect against claims that the photographer had been professionally negligent.