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Professional Indemnity Insurance Wiki
Professional indemnity (PI) insurance is a form of business liability insurance that protects against claims made by customers who are unhappy with the professional advice or service they received. It provides financial protection by covering the cost of legal defence and also any compensatory damages you're required to pay. Here's what you need to know before you buy a policy.
- What is Professional Indemnity insurance?
- Where can I get Professional Indemnity insurance quotes?
What is Professional Indemnity Insurance?
Professional liability insurance protects individuals and businesses who sell their expertise. It provides financial protection (in the form of legal defence costs and compensation payments) if any acts, errors or omissions in the advice or service you provide cause an alleged financial loss or damage to a client—and they sue you for it.
Even if you are extremely diligent and honest, mistakes can happen. And even if you haven't done anything wrong and a claim is not justified, you'll still need to defend any liability claim made by a client or third party. Professional indemnity insurance can cover the costs of a legal defence, which can add to up many thousands of pounds, and compensation if you're found liable.
Professional indemnity insurance (PII) is also called professional liability insurance or errors and omissions insurance (E&O). PII is a good complement to other types of business liability you might need, such as public liability or employers' liability insurance.
Quick takeaway: You're likely to need professional liability insurance if you are paid for your professional advice or services. Professional liability insurance covers the cost of your legal defence and compensatory damages related to advice or services you provided.
Professional Indemnity Examples
To give you an idea of how PI cover works and the types of situations it can cover, here are some examples of situations when professional indemnity insurance might protect a business (depending on the terms of the policy, of course):
- An architect designs a building that has to be halted midway through construction due to an error in the design. At great expense, part of the completed works have to be redone. The architect is sued for the costs and claims on their professional indemnity insurance to cover the costs.
- You forward an email to a client that was originally sent to you and contains a virus. The virus corrupts your client's database leading to financial loss and you are sued as a result.
- A financial advisor gives a client financial advise that leads to a loss. The client sues the advisor for professional negligence.
- A public relations company contracts a printing company to print posters for a company event. The posters are delivered a week late, and after the date of the event. The PR firm sues the printing company for breach of contract.
- An accountant makes a significant mistake on a company's bookkeeping records that results in a financial loss to the client.
- An interior designer recommends an expensive living room suite to a client, but the fabric did not meet the spec of "child and pet friendly" and is quickly ruined. The client sues the interior designer for the replacement cost of the furniture.
- A management consultant is hired by a food distributor to improve profitability. The food distributor implements the management consultant's plan, but a year later the food distributor's profit margin is significantly lower and they sue the management consultant.
- A garden designer is hired to plan an elaborate and expensive garden. Within a year of the garden being built, most of the plants are dead. The garden owner alleges the plants were not suitable for the soil and sun aspect.
- An interior designer
Why is Professional Indemnity Cover so Important?
Professional liability insurance covers you for legal defence costs and compensation awards in case a client (or possibly another third party) makes a claim for financial loss or damages due to your negligent advice or services. PI insurance is critical because legal costs are expensive and compensation awards can be BIG (tens of thousands, hundreds of thousands, even millions of pounds).
While the terms can vary from insurer to insurer, professional liability insurance typically protects against lawsuits arising from a wide range of situations that can befall a business:
- Negligence or breach of duty (e.g., giving incorrect advice, making a mistake or failing to deliver what was promised)
- Intellectual property (e.g., trademark or copyright infringement)
- Defamation (e.g., libel and slander)
- Computer Virus
- Dishonesty of Employees
- Acts or omissions of service providers (e.g., subcontractors)
- Loss of documents
Limit of Indemnity
The limit on a professional liability policy can be structured as an 'any one claim' or 'aggregate' basis, or both:
- Any one claim basis: Each individual claim has its own limit of indemnity. However, in a situation where there are multiple claims with the same cause, they're treated as a single claim.
- Aggregate basis: The limit of indemnity applies to all claims made against you during the period of cover.
Businesses that are members of a professional body (e.g., architects, insurance brokers, accounts, etc.) may have to meet certain minimum PI insurance requirements (more on that below).
Professional indemnity insurance is typically sold on a claims-made basis, which means your policy will only cover you for claims made while your insurance policy is still active, not after. This is important because a client might not discover an error you made until years after you worked for them.
If you cancel your policy or let it expire, it won't cover you anymore—even if the incident in question occurred while your policy was active. For example, if you had professional indemnity insurance but you let it expire at the end of 2019, then you're not covered for a claim in 2020 related to advice you gave a client in 2019 (even though when you gave the advice your policy was in force).
Anyone with PI cover who is changing professions or retiring should consider buying a "run-off" professional liability policy. This protects you against new claims that are made after your professional indemnity insurance expires or has been cancelled. According to information from Lexis Nexis, new professional negligence claims can be made up to six years after the damage, so your run-off policy should cover you for 6 years.
Many professional indemnity policies will include a 'retroactive' date. The retroactive date is the date from which you have held uninterrupted professional indemnity insurance cover—even if it part of the time it was with a different insurer.
Since professional indemnity insurance is sold on a 'claims-made' basis and you need cover when the damage occurred and when the claim is made, the 'retroactive date' feature allows you to switch insurers without creating a gap in your cover.
For example, if you are insured by company X from January 2017 until December 2019, at which point you switch to a new insurer Y, then the retroactive date on your new policy with insurer Y is January 2017. In this example you're covered by your insurer Y for any acts that occurred since January 2017, but not before.
If you've had uninterrupted cover then your retroactive date will be earlier than your policy start date.
Who Needs Professional Liability Insurance?
A person or business that provides professional advice, knowledge, skills or services needs professional liability insurance as part of their business insurance package. It will protect against legal defence costs and compensation payments to clients if you're taken to court for making a mistake, giving poor advice, being negligent, etc.
Some professional bodies and regulators legally require members to hold professional indemnity insurance due to the inherent risks of a certain profession. For example:
Professions that probably need professional liability insurance
- Accountants: see The Institute of Chartered Accountants in England and Wales
- Architects: see the Architects Registration Board
- Financial Advisors: see Financial Conduct Authority
- Healthcare professionals: see NHS Employers
- Insurance brokers: see Financial Conduct Authority
- Solicitors: see Solicitors Regulation Authority
- Surveyors: see RICS
- Engineers: check with The Institute of Acoustics (IOA), The Institution of Engineering and Technology (IET), The Institution of Civil Engineers (ICE), The Institution of Mechanical Engineers (IME), The Institute of Structural Engineers (ISE), Society of Automotive Engineers (SAE), NICEIC, The Chartered Institution of Building Services Engineers (CIBSE), Electrical Contractors Association (ECA), the Association for Consultancy and Engineering (ACE), and the Engineering Council, as appropriate
Examples of additional professions that should consider professional liability insurance
- Advertising agencies
- Business analysts
- Charities and associations
- Construction managers
- Construction professionals
- Consulting engineers
- Digital agencies
- Educational establishments
- Event promoter
- Management consultant
- Marketing companies
- Mortgage intermediaries
- PR agencies and designers
- Professional consultants
- Recruitment agents
- Security consultants (may be required by HSE)
- Software developers
- Writers for trade journals or magazines
What is Not Covered by Professional Indemnity Insurance?
Professional Indemnity insurance typically does not cover defective workmanship or any defective materials, deliberate acts or omissions, criminal acts, bodily injury (except in the case of medical malpractice), property damage, employment claims or personal and advertising injury.
Average Cost of Professional liability Insurance
While the average cost of professional indemnity insurance for small businesses in the UK starts from as little as £45 to £1,500 a year, prices can reach into the tens of thousands of pounds for even a mid-size company—for instance an architect with £1M in turnover. Prices depend mostly on your line of work and your turnover each year (they'll also ask about the size of your largest contract each year).
Professions like architects can pay a lot more than, because a mistake can have significant financial repercussions. For example, an architect's mistake could mean that a building has to be partially demolished and then rebuilt—at great expense. And if your activities are deemed "riskier" (say you are a management consultant involved in accountancy or tax advice, investments or financial services, M&A, insolvencies, liquidations, receiverships or turnaround management) then you'll not only pay a higher premium, but you'll have a harder time finding cover.
For example, we ran some test cases with Hiscox and found they'd provide quotes online for an accountant that performs audit work, general accountancy, payroll and personal tax consultancy—but they wouldn't offer an online quote for an accountant performing secretarial work or share registrations. This is just one example, but essentially many underwriters are less keen to cover 'riskier' work, at any premium (especially online quotes).
All that said, let's get an idea of starting costs for PII. Below we have some sample quotes for a test business to show how prices vary across industries. These are sample quotes only; you may need to pay less, or a lot more.
|Sample Professional Indemnity Costs (£2,000,000 of cover)||Average Premium|
|Independent Financial Advisor||£47|
However, Professional Indemnity insurance is priced based on the specific risks of your business. Your business structure can even make a difference—for example, liability insurance for a limited company can cost more than if you're self employed.
When quoting a Professional Indemnity insurance product, an underwriter will take into account many factors, including:
- Level of cover
- Size of your business (annual turnover, as well as the size of your largest contracts)
- Line of work
- Business structure (e.g., sole trader, partnership or limited liability company)
- Number of directors or partners
- Claims history
- Number of employees
Businesses that face higher risks will pay higher premiums than businesses viewed as lower risk, all else equal. Insurance underwriters perform their own internal risk calculations and so you may receive very different quotes from different insurance companies, even if the cover is equivalent between companies.
In fact, quotes could have more to do with an insurer's internal risk management than with your business specifically. For example, if an insurer decides they have written too many Professional Indemnity insurance policies for contractors lately, their risk appetite for writing new contractor liability policies may be quite low. As a result that company's quotes for new contractor liability policies could be much higher than the rest of the market.
Regardless of the reason, different insurance providers can quote VERY different prices for a similar cover. For example, when we priced cover for a software developer and management consultant we found that quotes from Hiscox (a higher-end brand) were 4X to 5X more than the cheapest plans in the market.
Considering all of this, it is always worth comparing how different insurers will price Professional Indemnity cover for your business—whether you are renewing or buying your first policy for a new small business.
How Much PI Cover Do I Need?
The first question frequently asked by businesses needing professional insurance is: 'How much PI coverage do I need?' Answering this question requires some specialist knowledge, which is why a lot of businesses use a experienced broker to help them with the process. And professional bodies often dictate the minimum PI insurance requirements for a business, so if you or your business is a member of a professional body it's critical to know what the rules are.
Minimum insurance requirements from professional bodies
Member of a professional body? They might have their own rules about minimum professional indemnity insurance limits that you'll need to follow. For example, the Financial Conduct Authority (FCA) requires insurance intermediaries to hold a minimum of €1,250,000 for a single claim and the higher of €1,850,000 and an amount equivalent to 10% of annual income (subject to a maximum of £30 million) in aggregate. (Read about the differences between single claim and aggregate limits in our article Business Insurance Basics.)
Members of the Architects Registration Board (ARB) needs at least £250,000 of PI cover for each and every claim; ACCA requirements for accountants depend on the level of fees earned each year (the highest fee is also a factor in the calculation), but start at £50,000 and can reach £1 million or more.
Below we've assembled links to some of the larger professional bodies in the UK, with links to their professional liability insurance requirements so you can learn more about the rules that apply to your business:
|Professional body||Field||Link to information about PII requirements|
|Architects Registration Board (ARB)||Architecture||ARB professional Indemnity guidance|
|Financial Conduct Authority (FCA)||Finance||FCA Professional Indemnity guidance|
|Association of Chartered Certified Accountants (ACCA)||Accountancy||ACCA Professional Indemnity guidance|
|Chartered Institute of Management Accounts (CIMA)||Accountancy||CIMA Professional Indemnity guidance|
|The Chartered Institute of Public Finance & Accounting (CIPFA)||Accountancy||CIPFA Professional Indemnity guidance|
|Institute of Chartered Accountants in England and Wales (ICAEW)||Accountancy||ICAEW Professional Indemnity guidance|
|Institute of Chartered Accountants of Scotland (ICAS)||Accountancy||ICAS Professional Indemnity guidance|
Where can I get Professional Indemnity insurance quotes?
Compare Professional Indemnity insurance quotes here—after filling out a short form you'll be put in touch with up to five insurance providers. As PII is a specialist market, this is a good chance to discuss your business, ask questions and decide how much professional indemnity insurance you need. Then simply choose the cover that offers the best price and features for your business.
Can you buy PII insurance directly from an insurer, or do you need a broker?
In most cases, professional indemnity insurance policies are arranged through a broker in the UK. As PII is a specialist product, a business can need quite a bit of guidance and support to ensure they find the right cover (from an insurance company or a Lloyd’s Syndicate) at the right price. A broker who is an expert in PII can help navigate the market.
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That said, you can buy professional indemnity direct from Direct Line for Business, AXA, etc. without using a broker. FYI, while Direct Line offers an online quote system, we've found that after filling in your details you won't get a quote—you still need to call in to talk to an insurance agent.
While going direct can seem convenient and result in lower fees, keep in mind that the agent works for the insurance company (e.g., Direct Line, AXA, etc.) not for you and will only price their in-house PII product; on the other hand an insurance broker (while they charge arrangement fees) should put your application out to a number of insurers to help find you a competitive price.
What to look for in a PII broker
Most businesses seeking a professional indemnity policy will work through a broker, but are all brokers the same? Absolutely not. Brokers have varying fee structures and specialise in different niche markets (e.g., accountancy, finance, design, etc.). In addition, not all brokers work with all insurers, and vice versa.
Top Tip: There are a lot of brokers in the PII market, but there is a much smaller pool of underwriters. While it can be useful to test out more than one broker, be wary of doing so because they might all be sending your details to the same set of underwriters—a situation better avoided. Before asking a broker to get quotes for you, be sure to enquire about which underwriters they'll use. This is useful to avoid overlap, and also to ensure that you get sufficient coverage of the market.
- Insurers: Which insurers does a broker usually place business with? And which insurers do they not have a relationship with?
- Niche: How much business does a broker place for businesses in your field?
- Fees: What fees does a broker charges to arrange a policy for you?
- Finance: Can a broker arrange monthly payments if you need them, and if so, what it will cost?
Finally, check customer reviews on sites like Trustpilot, Reviews.co.uk and Google to see what real customers have to say. For example, customers have rated Professionalindemnity.co.uk with 4.1 stars out of 5 at Trustpilot. When checking reviews be sure to look at the one-star reviews as these indicate a 'bad' experience. Look for references about ease of contacting customer service, speed of getting insurance documents, claims experiences and renewal prices. Also check the number of reviewers. In the case of Professionalindemnity.co.uk there were only 11 customer reviews when we checked, which is a pretty small sample so less reliable.
Professional liability, professional indemnity and errors & omissions insurance all refer to the same type of professional advice and services cover. The term "errors & omissions" is more common in the US, while "professional indemnity" is more common in the UK.
No, public liability insurance covers covers claims from third parties due to accidents (e.g., if a customer slips and falls in your business premises), while professional indemnity covers claims for errors or negligence in the advice or service you provide.
Professional indemnity is required by regulatory or some professional bodies for certain professions (e.g., healthcare, accountants, architects, engineers, surveyors, solicitors, financial advisors, insurance brokers) and is recommended for professions where you are paid for your professional advice or services (e.g., designers, construction, advertising, freelance, PR, etc.).
You need professional indemnity insurance to pay for legal defence costs and possible compensation payments if a client sues you for providing negligent advice or services (e.g., making a mistake).
The cost of professional indemnity insurance starts from around £80 a year in the UK, but can easily cost 10X as much or more for a small business depending on your profession and the amount of cover you need, as well as the size of your contracts. You may get a discount if you're a member of a professional association. It can be one of the more expensive business liability insurance coverages.
The amount of professional indemnity insurance you needs is dependent on four primary factors: your profession, the size of your projects, minimum limits required by any governing body you belong to and the amount of PI insurance expected by your clients. Keep in mind that there is no limit on compensation claims in the UK, so a serious case cost thousands or even millions of pounds. Consider how much of a financial impact a mistake or oversight on your part could have on your clients—that, plus legal fees, is essentially what you need cover for.