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Professional indemnity (PI) insurance is a critical risk management tool for any small business that gives advice or provides a service (free or paid for) that could cause a client to lose money. PI insurance protects a business if it is sued for professional negligence.
In this article
- Which small businesses need professional indemnity insurance?
- What professional indemnity insurance covers
- Why professional indemnity insurance is important for small businesses
- Where a small business can get professional indemnity quotes
- When to claim
Which small businesses need professional indemnity insurance?
While not a legal requirement, small businesses that provide professional advice or services need professional indemnity insurance—whether they're paid for their work or it's carried out for free. This includes sole proprietors, partnerships and limited companies. It doesn't matter what type of business structure you have, if you engage in this type of work you are at risk of being sued for professional negligence, so professional indemnity insurance is very strongly recommended. This also holds if you're a consultant or contractor.
Professions that should have professional indemnity insurance include, but are not limited to:
- 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 professional indemnity insurance covers
Professional indemnity insurance covers a business for legal defence costs and compensatory damages if a client claims you've delivered negligent advice or service.
- Legal defence costs
- Compensatory damages to the client
Professional indemnity (PI) insurance is also called professional liability insurance or errors and omissions insurance (E&O) in the US. PII is a good complement to other types of business liability you might need, such as public liability or employers' liability insurance.
Why professional indemnity insurance is important for small businesses
Businesses that sell their professional advice and services can be sued by clients who are unhappy with their work and allege they've lost money as a result. Clients expect a certain minimum level of expertise from a professional. If a client makes a decision based on the recommendations of a professional and it proves to be bad advice, then the client can sue, for example.
Professional indemnity claims can cost many thousands of pounds to defend (e.g., fees to hire legal and other experts) and even more in compensation payments to the client. Professional indemnity insurance pays for these costs.
Even if your business makes no mistakes and has done nothing wrong, a client can think otherwise and initiate a claim against your small business. In that case, there will still be legal fees to pay on your end, which can be covered by professional indemnity insurance. PI insurance also covers the cost to defend against frivolous, unsubstantiated claims.
Professional Indemnity Claims Examples for Small Businesses
- An architect recommends a specific finish on lead roofing for a home construction project. The finish damages the materials and the roof needs to be redone. The homeowner sues the architect for £3,000, the cost to replace that section of the roof.
- A graphic designer recommends a specific ink for use on a store front awning. Within a month of installation, it has bleached in the sun and is unreadable. The client sues the graphic designer for £1,500 to replace the awning.
- 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, many plants are dead. The garden owner alleges the plants were not suitable for the soil and sun aspect of the plot, and sues the designer for £7,000, which was the cost of the plants.
Where to get professional indemnity quotes for a small business
To learn all about the small business liability insurance market, you can read our in-depth article How to Get Liability Insurance for a Small Business—but if you'd like to fill out an online quote form right now to start the process, then click the blue button below. Fill in some details about your business and our partner QuoteZone will use their search engine to find up to 5 suitable professional indemnity insurance providers for your small business.
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Professional indemnity can be purchased independently or as part of a package, for instance a construction insurance policy could include professional indemnity along with other important coverages like public liability and employers' liability.
When to claim
If a client has a financial loss that they blame on your professional negligence, they can sue your business. Once that happens, or as soon as you know it is a possibility, contact your professional indemnity insurance provider. They will advise you on next steps and put you in touch with legal support to defend your business.