Why Start-Ups Can't Afford To Skip Professional Indemnity Insurance

In the early days, every penny counts, and a single legal claim can be catastrophic. Whether it’s a client accusing you of negligence, a contract dispute, or an error in your service delivery, the financial burden and damage to your reputation can be irreparable. That’s where professional indemnity insurance (PII) comes in.

In this article, Adrian Lockyer, Head of Product and Capacity for Towergate Insurance Brokers, explores why skipping PII is a gamble most start-ups simply can’t afford to take.

Mistakes can happen

PII is often overlooked in the early stages of a business. It is seen as an unnecessary expense or something to worry about later, but, in reality, it’s a critical safety net.

In the initial stages, founders often juggle multiple roles - marketing, operations, finance, and client service - while still learning the ropes of their industry. This multitasking, combined with inexperience, significantly increases the risk of mistakes or oversights that could lead to costly claims of professional negligence. Adrian explains, “When starting up a new business, while trying to manage everything and gain experience, mistakes can happen.”

PII shields start-ups from the financial consequences of such claims. Whether it’s an error in advice, a breach of contract, or a failure to deliver services as promised, PII covers legal costs and any damages awarded. This protection is not just about financial security - it’s about business continuity. A single claim could otherwise derail a fledgling company.

PII is a strategic asset

You might be asking yourself, why is PII crucial for start-ups? In short, PII is a strategic asset that supports growth, builds trust, and protects against the unpredictable nature of early business life.

In some cases, having PII is not optional – third-party contracts may require it. For start-ups aiming to grow and secure partnerships, being insured is often a prerequisite.

Clients are more likely to trust a start-up that demonstrates responsibility and foresight by holding PII cover. Adrian notes that holding PII can significantly boost client confidence in start-ups, as “the business can have peace of mind knowing they won’t face financial difficulty due to damages awarded for breach of professional duty.”

Repercussions of not having PII

Not having PII can leave start-ups dangerously exposed, especially during the critical early years when financial stability is often fragile. Without this essential cover, a single claim of professional negligence could lead to devastating consequences. In fact, according to the UK Law Society, small claims in County Courts now take an average of 54 weeks to reach trial, creating a prolonged period of uncertainty and financial strain for small businesses¹.

“Companies and, more importantly, start-up businesses cannot afford to be without PII, especially in the first year of trading. Failure to have PII in place will leave the business exposed with a possible consequence of going out of business if a claim is successful.” Adrian warns

Start-ups typically operate with limited cash flow and tight budgets. In the absence of PII, any legal claim – whether justified or not – must be defended out of pocket. Legal fees, court costs, and potential compensation payouts can quickly escalate into tens of thousands of pounds, threatening the very survival of the business.

As Adrian puts it, “In the first three years, most start-ups aim to break even or make a small profit, leaving little room for unexpected expenses like legal damages.”

The misconceptions of PII

Adrian highlights that many new businesses mistakenly believe PII is only for businesses that give formal advice and therefore do not need insurance. In reality, PII protects against a wide range of professional errors like miscommunication, missed deadlines, or unintentional breaches of contract, all of which can happen in any service-based business.

Even if you don’t give advice, your work can still be challenged. And while it may seem like a cost-saving measure to skip it, the financial impact of a single claim can far outweigh the premium. Adrian argues that “if you’re running a business to a tight budget, then PII is just as important as insurance cover for your property”.

Typical claims scenarios

So, what are the most common types of PII claims? Adrian advises that the most common PII claims seen at Towergate Insurance Brokers typically involve:

• Failure to follow plans or procedures correctly
• Substandard or poorly implemented risk assessments
• Employees not adhering to training
• Genuine human errors

Choosing the right policy

PII often needs to evolve as the business evolves. Increased clients, services, and revenue can raise exposure to risk. Regular policy reviews ensure coverage keeps pace with these changes.

Insurance brokers play a key role in this, Adrian explains. “As a business grows, they need to work with an insurance broker to review both the coverage and the indemnity limits under their PII policy in relation to the activities they provide.”

Adrian adds that working with a reputable broker and insurer – one who understands the required coverage and sector-specific risks – is essential. Insurance brokers can help tailor policies to match growth and avoid costly underinsurance gaps. They will guide you through the process, ensuring your policy aligns with your business needs.

Be proactive

In addition to having the right insurance, start-ups can reduce the risk of a PII claim by “having robust policies, plans, risk assessments and training programmes that are reviewed and refreshed regularly.  There are third party specialist companies that can come in and undertake these reviews on your behalf for added peace of mind.”

Regular staff training, quality control checks, and adhering to industry standards also help. Proactively managing risk builds trust and reduces the likelihood of costly errors.

Professional indemnity insurance with Towergate Insurance Brokers

For start-ups, PII is a strategic necessity. It protects against the unexpected, builds client trust, and ensures your business can weather early challenges. Don’t wait for a claim to realise its value. Contact Towergate Insurance Brokers today to discuss your PII needs.

Sources:

[1] Small claims taking more than a year to reach trial | The Law Society