Professional Indemnity Insurance Explained

Protect your small business with our ultimate guide to professional indemnity insurance, also known as professional liability insurance.

What is professional indemnity insurance?

Professional indemnity insurance is a type of liability insurance designed to protect businesses and individuals who provide advice or expertise to third parties.

Also known as professional liability insurance or errors and omissions insurance (E&O), this cover is designed to protect you if a customer alleges that you provided faulty or inadequate advice and services. If you have professional indemnity insurance, the cost of your legal defence will be covered, along with compensation you may need to pay to the client following a claim made against you.

 

Professional indemnity insurance should not be confused with other types of business insurance which cover more ‘tangible’ grievances, such as:

  • Public liability insurance

    Cover for claims made by third parties (members of the public) if they are injured or have their property damaged during the course of your work.

  • Employers' liability insurance

    A legal requirement if you have employees, this cover protects you if someone you employ claims compensation due to an accident or illness which has arisen as a result of their employment with you.

  • Product liability insurance

    If a member of the public is injured, becomes ill or has their property damaged as a result of a product you have manufactured, supplied or distributed, you could be liable. Product liability will cover compensation and your legal defence.

What does professional indemnity insurance cover you for?

  • Your legal defence

    If a client does bring a claim against you, you’ll need to defend yourself in court whether their claim is justified or not. PI will cover the legal expenses associated with the case.

  • Compensation

    If a client wins their case against you, they are likely to be awarded the sum of money they lost as a result of your advice. In addition, they may be awarded compensation. Both of these are covered by a PI policy.

  • Run off insurance

    If your firm is ceasing to operate, you may still have a claim pop up unexpectedly in the future. Run off insurance is to ensure these claims are still covered and you are not left liable.

Do I need professional indemnity insurance?

Some professions are required to have professional liability by regulators in their industry. This includes:

    • Financial advisers
    • Solicitors
    • Architects
    • Chartered surveyors
    • Healthcare professionals

Though not a legal requirement for everyone, professional indemnity is worth considering by any company or sole trader that is in the business of offering advice, knowledge or skills as part of their services. It’s also worth remembering that, with this type of cover, you’ll be protected regardless of whether a claim is justified or not.

Furthermore, one of the most exciting business trends of recent years is the rise of independent consultants and small businesses, which offer highly-specialist knowledge, skills and advice to clients and customers.

Offering these kinds of services is not without its risks. Mistakes are made from time to time, and without the right cover, these can prove costly.

Examples of professional indemnity claims

Depending on your sector, the kinds of professional indemnity claims you could encounter will vary dramatically. For instance, a spelling mistake on a printed advert could land the responsible marketing agency in hot water.

That said, there are some common claims which affect most industries:

  • Professional negligence

    This occurs when you make an error while doing a piece of work for a client. For instance, if an engineer designed a heating system for a large hotel reception room but did not consider its size adequately, meaning the installed radiators did not heat the area sufficiently and the system had to be removed and redesigned.

  • Loss of money or goods

    Should your client entrust you with money or goods which you subsequently lose, they could sue you. A typical scenario would involve a shoe mender being entrusted with a customer's shoes: they are legally liable for the safe storage and return of the shoes.

  • Losing documents or data

    When business documents and data are lost, companies risk their trade secrets falling into their competitors’ hands. If an IT contractor loses confidential information, a claim could be made against them.

  • Defamation: libel and slander

    Libel and slander insurance covers you against a law suit should someone feel that you have written or said something defamatory about them that is also false. Slander is the term for anything that has been spoken and libel for anything written.

  • Breach of copyright or confidentiality

    Accidental use of another’s intellectual property can be an expensive mistake. If a graphic designer uses a font without permission, they are breaking copyright law and could be sued.

How much professional indemnity insurance do I need?

Professional indemnity insurance is often sold in varying limits. To decide how much professional indemnity insurance you need, you should consider:

    • The size of your business
    • The size of the clients you are dealing with
    • How much it might cost to defend yourself in court
    • Is your industry regulated?

The amount of cover required will depend on the amount of exposure that your client has.

If you’re in an industry which requires you to have professional liability due to regulations, it’s likely that there is a recommended amount of cover associated with your profession. You can check this with your regulator to ensure you’re covering the amount required of you.

 

Do I need both professional indemnity and public liability insurance if I am starting my own practice?

Starting your own practice can be an exciting time, but it can also be daunting going out on your own, particularly with all the set up costs involved. When it comes to insurance, you need to consider whether you can afford not to have it in place. Faith Chapman from Towergate Insurance explains why professional indemnity and public liability insurance is important:

Professional indemnity cover will protect against any claims made against you should you be accused of Professional Negligence, this can include things such as incorrect advice or recommendation, breach of professional code of conduct, loss of documents or breach of confidentiality. A client could allege that as a result of a recommendation you made in a session, they have suffered an adverse effect and as a result they have been harmed. This type of policy will cover the costs to defend you against this allegation, and ultimately if the client is successful in suing you, will pay out the damages awarded.

Public liability cover will protect you in the event of any claims made in respect of accidental injury or damage to a client or a member of the public, and it also covers loss or damage to public property. If for example you accidentally spilt coffee on a client’s laptop this would be covered or if a client were to trip over whilst visiting you, this policy would cover the legal costs to defend you, and again pay out if the client was successful in suing you.

Small business professional indemnity insurance

One survey found that 75% of small business owners are worried about making professional mistakes, yet less than half of those who give clients advice take out professional indemnity insurance.

If you’re a sole trader or heading up a small business, your client-base and budget might be limited, but the cost of a claim made against you can be damaging without the right cover.

Professional indemnity insurance for businesses like yours

The recent rapid growth in the number of small, dynamic businesses and freelancers in the UK is hugely exciting. Filling out niches which never existed until the last few years, this sector of the economy has a very positive future ahead.

At Towergate, our professional liability policy provides cover for both professional indemnity and public liability meaning you only need one policy. Visit our professional indemnity insurance page or call 0330 123 5128 for more information.

This is a marketing article from Towergate Insurance.

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