An overview of professional indemnity insurance
What is professional indemnity insurance?
Professional indemnity insurance covers the cost of compensating clients for loss or damage resulting from negligent services or advice provided by a business or an individual.
Do I need it?
If you offer your knowledge, skills or advice as part of your profession – either as a self-employed individual or for a company – you should consider taking out professional indemnity insurance.
Some professions are required to have professional indemnity insurance by their professional bodies or regulators – these include:
- chartered surveyors
- financial advisers
- some healthcare professionals
Many other businesses choose to take out professional indemnity insurance to protect themselves against claims – these include:
- advertising agencies
- design agencies
- public relations agencies
- engineers, arhitects etc
Common claims that professional liability insurance covers are negligence, misrepresentation, violation of good faith and fair dealing, and inaccurate advice. Examples include:
If a software product fails to perform properly, it may not cause physical, personal, or advertising damages, therefore the general liability policy would not be triggered; it may, however, directly cause financial losses which could potentially be attributed to the software developer’s misrepresentation of the product capabilities.
Repair or replacement of failed product
If a custom-designed product fails without causing damage to person or property other than to the subject product itself, a product liability policy may cover consequential damages such as losses from business interruption, but will generally not cover the cost to redesign, repair or replace the failed product itself. Claims for these losses against the manufacturer may be covered by a professional liability policy.
What it covers
Professional indemnity insurance protects you against claims for loss or damage made by clients or third parties as a result of the impact of negligent services you provided or negligent advice you offered.
Compensation claims can be brought against you even if you provided a service or offered advice for free.
Conditions of your cover
Professional indemnity cover is usually offered on a claims-made basis. This means that your insurer will only cover you for claims that are brought against you during the term of your policy. If a claim is made against you after your policy has expired – even if the incident occurred while your policy was in place – you will not be covered for that claim.
For example, if an incident occurred in 2011 when you had professional indemnity cover, but the client brings a claim against you in 2012 – after your policy has expired – your insurer will not cover you for that claim.
If you cancel your professional indemnity insurance, for example if you are retiring or changing professions, you should consider purchasing a run-off policy. This covers you for any new claims that are brought against you after your professional indemnity insurance has expired.
New claims can be brought against you for up to six years after an alleged negligent act occurred, so your run-off policy should cover you for this period.
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.
Buying professional indemnity insurance
You can buy professional indemnity insurance directly from an insurer or from a specialist broker through the British Insurance Brokers’ Association (BIBA). The amount of cover you need – and the price of your premium – will depend on your occupation.
Some professional bodies and regulators insist that their members are insured for a minimum amount. For example, solicitors are required to have professional indemnity cover of between £2 million and £3 million for any single claim made against them.
If you are not a member of a professional body you can ask your clients how much cover they expect you to have.
Read the article on what insurance options are available and why they are important for further information.