One type of insurance cover which is frequently overlooked is Professional Indemnity. Often, this is because business owners either aren’t aware of it, or they think that it doesn’t apply to them, However, in the unfortunate event it should ever be needed, a PI policy could end up paying for itself hundreds of times over.
Small business owners and their employees are only human. Even if you continually strive for 100% perfection in your business, there is always a small chance that something could go wrong. When a mistake or an unintended error of judgement occurs, Professional Indemnity insurance can help you to recover losses from compensation claims made against you. Without it, the consequences could be very costly indeed.
What is Professional Indemnity Insurance?
Professional indemnity insurance protects professionals and businesses against unexpected compensation claims and associated legal costs. It is most relevant for those who give professional advice, or provide other types of professional services or skills.
A compensation claim may arise if a person or business is deemed to have been negligent by providing inadequate services, poor designs, or bad strategic advice. A claim may also arise from a genuine mistake, such as taking inaccurate measurements which result in a botched design for a client. A customer may also sue your business if you accidentally disclose confidential client data to a third party.
In short, anything that causes a financial loss, a data breach, or reputational damage for a customer due to your professional involvement could be classed as professional negligence.
Such compensation claims can be very costly to settle (often running into tens of thousands of pounds), particularly when legal fees and other expenses are factored in. Professional Indemnity insurance covers legal costs for defending a claim, as well as any financial compensation (damages) awarded to a client.
Professional Indemnity insurance is not a legal requirement. However, a PI policy can offer business owners the reassurance that, should something go wrong, they are covered financially.
What's the difference between public liability and professional indemnity?
There are similarities between Professional Indemnity insurance and Public Liability insurance, in that they both cover compensation claims made against a business.
However, although Public Liability insurance covers claims against certain types of negligence, it doesn’t cover claims arising out of professional negligence. So, in certain situations, you may be uninsured if you do not have Professional Indemnity insurance in place.
For example, if you are a roofer and you were to drop something which injured a passer-by below, you would be covered by Public Liability insurance. However, if you design a new roof for a client which subsequently leaks due to inaccurate specifications, Public Liability insurance would not cover you, as this would be classed as professional negligence. This is an instance where Professional Indemnity insurance would apply.
Who needs professional indemnity insurance?
Depending on the nature of the trade, Professional Indemnity insurance may be advisable for freelancers, sole traders, contractors, the self-employed, and small businesses.
Most businesses would be well-advised to take out PI insurance, but If you work in an industry that puts you at greater than average risk for potential professional negligence, then you should definitely have a policy in place.
Professional Indemnity insurance cover is particularly advisable if you:
– handle highly sensitive, confidential client data or intellectual property;
– plan and design products, buildings, services or software;
– provide professional advice, such as legal or financial advice;
– provide a professional service, such as marketing or consultancy services.
If you are producing designs and specifications … you should consider professional indemnity insurance because the client could give those designs and specifications to a different electrical contractor to get the work done. If injury or damage resulted from a defect in those designs and specifications, you would be legally liable rather than the electrical contractor that did the work, but any compensation claim would not be covered by your public liability insurance.
(tradesmansaver.co.uk)
In some professions, it is standard practice for clients to insist that you have Professional Indemnity insurance in place before you can start contracted work for them. Some client contracts may even require you to have a specified level of PI insurance (contracts will often specify a minimum indemnity figure). This means that if you don’t have PI insurance, opportunities to bid for work on new projects will be very limited.
Examples of professions where PI insurance may be a contractual requirement include management consultants, marketing consultants, software designers, architects, accountants, financial advisors, legal advisors, and engineering contractors.
What’s more, many industry regulators, trade associations and professional bodies also require that their members hold a minimum amount of PI insurance cover, as a condition of their membership. Where a business or freelancer is unable to provide evidence of their policy, their membership could be cancelled or invalidated.
Even when this does not apply, many business owners still decide to take out PI for their own peace of mind, as well as to reassure potential clients.
What can be covered by professional indemnity insurance?
Your Professional Indemnity insurance may cover some or all of the following eventualities, where they cause a financial loss or reputational damage to a client.
Unintentional loss, misplacement, or damage to confidential documents or data (even if the loss occurred due to an event outside of your control, such as a fire);
Breach of professional duty (professional negligence) – where a client believes that your business has failed to live up to an agreed duty of care standard, causing them to lose money. This could be due to poor advice, incorrect information, dishonesty or mistakes (whether intentional or not);
Defamation – where libellous or slanderous statements have been made about the character of a person or organisation, causing reputational damage, mental anguish and emotional distress;
Breach of contract, confidentiality or copyright – where information is shared without authorisation, or where copyrighted material, a trademark or intellectual property is infringed (for example, where it is alleged that you have plagiarised someone else’s work);
Data breaches – where your client’s data is leaked or stolen whilst in your possession;
Bodily Injury / Property Damage – where a customer is injured, a building is compromised, or contents (e.g. stock and equipment) are damaged due to poor designs, inaccurate specifications or miscalculations;
Deliberately dishonest, fraudulent or malicious acts by any former or present employee – this might include an employee who steals from a client, for example*;
Cyber-attacks – for example, where a client’s website is attacked by hackers or fraudsters due to poor design, or where a malicious virus has been spread unknowingly on a client’s computer network, due to your negligence;
Claims expenses – legal costs and settlement fees associated with a compensation claim against you;
Retroactive PI cover – this type of cover will insure you against past liabilities, even when you have stopped trading for whatever reason (as long as you had valid PI insurance in place at the time).
Finally, it should go without saying that deliberate acts of negligence or dishonesty by the insured is not included in PI cover.
*Many PI insurance policies do cover acts of negligence caused by employees, but you should check your policy details carefully to be sure.
Three quarters of small business owners say they worry about making mistakes on client projects, almost half worry about giving bad advice, and a quarter worry that one of their clients will make a compensation claim related to their professional services. But despite their worries, more than half of those paid by clients for business advice still fail to buy professional indemnity cover. (axa.co.uk)
What level of professional indemnity cover do I need?
The amount of cover you need will depend on the level of risk associated with the type of work you’re engaged in.
Generally, a professional indemnity policy will provide between £100,000 and £5 million in cover. Compensation costs can vary significantly, based on the type of claim that’s awarded and the severity of the particular circumstances, but legal fees can be very expensive in many cases.
If you’re not sure how much cover you need, find out how much your potential clients would expect you to have. Many clients state the value of the cover they require as a contractual condition of business, so this should give you some idea.
You should also think about the total value of the types of projects you work on, which will give you an idea of what could be at stake should something go terribly wrong.
As a general rule of thumb, £1 million worth of Professional Indemnity cover should suffice for most businesses, and this amount should also meet the contractual requirements of the majority of clients.
Summary
Although Professional Indemnity insurance is not a legal requirement for most businesses, it is nevertheless a type of cover that, ideally, no business should be without. After all, nobody expects to find themselves open to allegations of professional negligence, yet hundreds of businesses are accused of this every year.
Those providing professional services that can easily be challenged are particularly vulnerable to claims of professional negligence each time the service falls short of a client’s expectations. These types of businesses and self-employed freelancers really ought to take out at least some amount of Professional Indemnity cover.
Although many claims can be settled before they get to court, the legal costs can escalate greatly, even for minor disputes. With Professional Indemnity cover, you can rest assured that your insurance provider’s specialist PI team will not only defend claims on your behalf, but will also cover your legal fees and meet any damages incurred if you are found to be liable.
After all, peace of mind is priceless!
