What is professional indemnity insurance?
Professional indemnity insurance, also known as professional liability insurance or errors and omissions (E&O) insurance, is a type of insurance designed to protect professionals and their businesses against claims made by clients for losses or damages due to the professional service or advice provided.
This types of business insurance is particularly important for sole traders and companies in the service industry who provide expertise, advice, or professional services to their clients. The main purpose of professional indemnity insurance is to cover legal costs and expenses incurred in the defense against a claim, as well as any damages or settlements that may be awarded to the client if the professional is found to be at fault. The policy is designed to offer protection in cases where a mistake, negligence, or omission in the professional service provided causes financial loss or harm to a client.
As a specialist in your subject matter, clients rely upon your skill, knowledge, and due diligence to deliver on the services agreed. If a client feels you haven’t delivered under the terms of your agreed contract or have breached your professional duty, they may consider seeking financial compensation through the courts. Additionally, many regulatory bodies, and clients may require you to arrange professional indemnity insurance to meet industry regulations or as a condition of engagement.
Professional indemnity insurance is a policy that can not only provide for legal support and financial protection, it can promote trust with your clients that you have sufficent financial resource available to meet future compensation claims.
What does professional indemnity insurance cover?
Generally, the cover will include protection against claims of professional misconduct, negligence, breach of duty, misrepresentation,
defamation, and incorrect advice, and other
civil liability claims. However, cover can vary widely depending on the profession, the specific risks associated with the services provided, and the terms agreed under the policy.
Below we've taken a close look at the cover typically provided under a professional indemnity insurance policy.
1. Negligence: Mistakes, errors, omissions, or oversights in the professional services provided. Failure to meet professional standards or expectations. Incorrect advice or guidance given to clients.
2. Breach of Contract: Failing to perform duties as agreed upon in the contract with the client, leading to financial loss or damage. Typically a lower burden of proof compared with negligence.
3. Libel and Slander: Otherwise known as defamation, whereby the act of making false statements harms the reputation of an individual or organisation who then makes a compensation claim.
4. Infringement of Intellectual Property Rights: Unintentionally infringing on the intellectual property rights of others through the services provided will typically trigger a claim under a policy.
5. Breach of Confidentiality: Unintentional sharing or misuse of confidential information belonging to a client or third party can cause significant financial loss to the third-party.
The business insurance will cover the legal costs associated with defending against a claim, including solicitors fees, and court costs. the policy will also cover any damages, judegements, awards, or settlements (agreed with your insurer). On the basis the business or professional is found liable for the financial loss.
Why professional indemnity insurance is important?
If a client feels you haven’t delivered under the terms of your agreed contract or have been negligent, in an increasingly litigious society they may consider seeking financial recompense through the courts. Professionals need to ensure they have sufficient business insurance protection to guard against claims for financial compensation. Professional indemnity insurance allows your business to trade with the knowledge you have access to legal and financial support if required.
This business insurance is an essential part of risk management for professionals, ensuring that they can continue their business operations without the potentially devastating financial impact of a legal claim. In many industries, having professional indemnity insurance is a contractual requirement before a professional or firm can provide services to clients. Clients and regulatory bodies often require proof of insurance to mitigate the risks of financial loss from professional errors.
Having professional indemnity insurance can enhance a professional's reputation and increase client trust. It reassures clients that they will be compensated if they suffer a loss due to the professional's advice or service. This can be a competitive advantage in acquiring new clients.
For certain professional bodies, holding professional indemnity insurance is mandatory to comply with regulatory, professional body, or licensing requirements. It's seen as a component of maintaining professional standards and responsibility. The cover can also provide peace of mind to professionals, allowing them to perform their duties without the constant worry of potential legal action for mistakes or oversights. Knowing that they have financial and legal support allows professionals to focus on their work and business growth.
How does professional indemnity insurance work?
Professional indemnity insurance works by providing a safety net for professionals and businesses against the financial consequences of claims made by clients for errors, omissions, or professional negligence that have caused the client a financial loss or harm. Here's a breakdown of how this type of insurance typically works:
1. Policy Purchase: A professional or business purchases a professional indemnity insurance policy, choosing coverage limits based on the potential risks associated with their profession and the size of claims they could potentially face. Premiums are paid annually or monthly.
2. Claim Made by a Client: If a client believes they have suffered a loss or damage due to the professional's advice, service, or negligence, they may file a claim against the professional or business. This claim states that the professional's action or lack thereof has directly resulted in financial loss or harm.
3. Notification and Review: The professional must notify their insurance provider about the claim as soon as possible. The insurer will review the claim to determine whether it falls under the policy's coverage based on the terms and conditions of the policy.
4. Defense and Legal Costs: If the claim is covered, the insurance company will typically take over the defense of the claim, appointing legal representation if necessary. The policy covers legal costs and expenses associated with defending the claim, up to the limits of the policy.
5. Settlement or Judgment: The insurer may negotiate a settlement with the claimant on behalf of the professional if it is deemed appropriate and cost-effective. If the claim goes to court and the professional is found liable, the insurance will cover the compensation amount awarded to the claimant, again up to the policy's limit.
6. Excess and Limits: Most professional indemnity policies include an excess (deductible), which is the amount the insured must pay towards any claim. The policy will have a limit of indemnity, which is the maximum amount the insurer will pay in the event of a claim. These limits can be per claim or aggregate over the policy period.
Key features of a professional indemnity policy
Claims-made Basis: Professional indemnity insurance typically operates on a claims-made basis, meaning it covers claims made during the policy period, regardless of when the actual incident occurred, as long as it was after the retroactive date (if applicable).
Retroactive Date: Some policies include a
retroactive date, covering incidents that occurred after this date, provided the claim is made during the policy period. New policies might exclude previous known claims or circumstances that could give rise to a claim.
What is professional indemnity insurance?
"Professional indemnity insurance, otherwise known as PI insurance, is financial protection against the failure to exercise reasonable skill and care in the provision of professional or advisory services."
What professional indemnity insurance excludes?
Cover will typically exclude guarantees, warranties, liquidated damages (promise to pay if a service is not performed), or assume a third party's liability. Each insurer's professional indemnity policy will have different terms and conditions, therefore its worth considering the exclusions applied to the proposed cover. It's also worth considering whether your services could ultimately cause bodily injury or property damage - for example heath and safety consultancies should consider cover that does not contain an absolute exclusion.
Different professions may require specific coverage tailored to their unique risks. For example, IT consultants might need more extensive coverage for data breaches and cyber liability, while architects and engineers may need coverage that includes the physical impacts of design errors.
How does public liability insurance compare?
Public liability insurance and professional indemnity insurance are two distinct types of business insurance that serve different purposes, though they are both crucial for businesses and professionals. Public liability insurance is designed to protect businesses and individuals against claims made by third parties for physical injury or property damage that occurs as a result of their business activities. Whereas, professional indemnity insurance is about the financial and reputational risks associated with the professional services provided. It is recommend that businesses and professionals arrange both types of insurance to esnsure they are fully protected against potential claims.
