Professionals across different industries face numerous risks that can disrupt operations, damage reputations, and result in financial losses. By understanding these professional risks, businesses can seek to mitigate and transfer where possible to ensure they achieve their strategic objectives. Below we take a closer look at the different types of professional risks and the measures professionals can undertake to safeguard their business.

What is professional liability?

Professionals have a responsibility to perform their duties with the level of skill and care expected within their industry. Liability can arise when a professional fails to meet their duty of care, resulting in harm or loss to a client or third party. Legal and financial risks and arise when professionals fail to adhere to laws, regulations, or contractual obligations. Allegations and claims for damages can lead to protracted litigation which is both costly and time consuming. Professional indemnity insurance is the most important risk transfer solution that any professional can arrange, however it should be considered in tandem with other commercial insurance products.

Example Professional Risks:

An architect may be accused of professional negligence when failing to identify a design flaw within their technical drawings.
A software company may breach a contract with a client and face demands for compensation for consequential losses.
A marketing agency may inadvertently breach intellectual property laws by using copyrighted materials without permission.
A consultancy firm may be accused of defamation if they have published an article concerning a competitor on their website.
A recruiter may be held vicariously liable for a temporary work placement where they failed to undertake sufficient due diligence.

Liability risks for professionals

Types of professional risks that give rise to professional liability claims:

Small business owners and risk managers should identify, evaluate and mitigate potential professional risks wherever possible. We have focused on the most concerning risks that can lead to professional liabilities.

Negligence

Any potential claimant must prove a failure to exercise reasonable skill and care in the discharge of their services. Negligence is the failure to act with due care or diligence which causes harm, which could include personal injury, damage to property, and economic loss. Professional negligence is a tortious liability, which is typically means the claimant must prove: (1) the professional owed them a duty of care, (2) the professional has breached that duty, and (3) the claimant has suffered financial loss as a direct result of that breach.

For professional negligence claims, you have six years to begin litigation proceedings. If an allegation of negligence is upheld, the professional is likely to be liable for:

the losses incurred by the claimant, including consequential losses which are reasonably foreseeable; and
the claimant's legal costs - which can be substantial and often larger than the loss.

Breach of contract

If a professional fails to fulfill their contractual obligations and the client suffers financial loss, the client can apply their rights under contract and seek compensation. Nearly all commercial contracts these days will stipulate a clause relating to deliverables and duties to be carried out with ‘reasonable care and skill’. Missed deadlines, incomplete deliverables, failure to meet agreed standards, or breach of confidentiality could all lead to a breach of contract allegation.

Breach of contract claims are the most common type of claim made under professional indemnity insurance policies because the burden of proof compared with proving negligence is often lower.

Defamation

Can mean either libel or slander - whereby something written down, recorded, or said, causes harm to the character of the person or a company. Claims can arise, whereby a competitor, counterparty, contractor, or any third-party, suffers as a result of a statement made by the business or one of its representatives. These types of claims can include damages for loss of earnings and financial distress.

For a statement to be considered defamatory under UK law, it must be false, it must be communicated to a third party, and it must result in harm to the claimant's reputation.

Breach of copyright

Copyright is infringed when someone carries out any act that is restricted by copyright without the copyright owner’s permission. In the UK, copyright law is defined in the Copyright Designs and Patents Act 1988. Professional indemnity policies can offer protection if someone claims you have infringed their copyright, whether unintentionally or on purpose. Unfortunately, infringing on someone else’s copyright can easily be done especially in the age of the internet.

Breach of confidentiality

Breach of confidentiality occurs when information or data is released which was not already in the public domain without the owner's consent. Whether an accidental error, intentional breach, or theft, the person that owns the confidential information has the right to seek damages for potential losses. The sensitivity of the information and the potential losses that can arise can vary significantly depending upon the circumstances. For example, a breach of confidentiality could occur when a company laptop is stolen.

Fiduciary duty

A professional owes a fiduciary duty when they are entrusted with responsibilities that require them to act in their client’s best interests. Fiduciary duties are commonly associated with legal and financial professionals, given the professional is in a position of trust over a client’s affairs or assets. For example, if a partner of a law firm mistakenly transfers money to a fraudulent bank account, the law firm could be held legally liable.

Risk management to avoid professional liabilities

Each profession will need to consider their own industry best practices and regulatory requirements. However, we have highlighted some key processes and controls that professionals can reduce their future exposure to claims, safeguard their reputation, and maintain the trust of their clients. It's worth noting that legal liability can arise if you fail to deliver a service or professional advice to a standard of your industry peers.

Contract risk management

Contract risk management is a useful tool and often used as the first line of defence when rebutting any allegations made against you. It's recommended that regular contract reviews are undertaken and that you seek legal advice to ensure compliance with evolving regulations and industry standards.

It is typically recommended that the following are applied:

clear contracts - that defines what each party is responsible and reduce the risk of any misunderstandings;
standards of performance - not greater than reasonable skill and care;
limitations of liability - which attempt to restrict the damages one party can recover from the other party;
consequential losses exclusion - seeks to exlude damages which are not a direct result of an incident;
dispute resolution clauses - ensure any grievances are dealt with early and they do not ecalate into legal disputes.

Professional due diligence

A high standard of skill, care, and attention should be applied to ensure that decisions are well-informed, services are accurate, and professional risks are minimised. Due diligence is a critical responsibility for professionals across various industries to meet their legal and professional obligations. Below we have identified some industry best practices:

standardised templates - which assist with ensuring consistency;
peer reviews - to check work undertaken to identify and correct mistakes;
record keeping - to ensure accurate records of all client communications;
software - such as diary systems to ensure early reminders of pending deadlines;
internal audits - to assess the accuracy and quality of deliverables;
client vetting - to ensure reasonable expectations and assess financial standing;
sanction checks - to ensure you are not breaching sanction laws.

Preventing professional indemnity insurance claims requires a proactive approach that combines clear communication, robust processes, and ongoing vigilance. By implementing these risk management controls, professionals can not only reduce the likelihood of claims, but also strengthen client relationships and maintain a positive reputation.

What other professional liabilities should be considered?

Cyber liability

Your professional indemnity insurance policy may have historically included cover for cyber related incidents, however it is more commonly accepted that insurers will now seek to exclude cover. If you haven't purchased seperate cyber insurance you could find the business exposed to cyber events with no insurance protection. Data breaches, phishing scams, ransomware, denial-of-service attacks, network disruptions, malware attacks, phishing scams, employee actions, social engineering fraud, IT failures, and IT vendor failures - coud lead to a situation whereby you are faced with compensation claims by your clients or third-parties.

Director's liability

Professional indemnity insurance will not cover risk associated with managing the business. Directors and individuals that make decisions on behalf of the company can be held personally liable under a number of statuate laws. It's is not uncommon for directors to assume they are protected because the company has limited liability - claims against individuals can arise from shareholders, regulators, suppliers, customers, competitors, administrators, and employees.

Employment practices liability

A professional indemnity insurance policy will not cover claims that arise from employment related disputes. For example, if you are required to defend the company at an emplyment tribunal for wrongful dismissal, harassment or discrimination. Employment practices liability insurance can provide a legal defence and pay any awards made. Read more

Employers liability

Employers liability insurance is a legal requirement if you have employees. The insurance will offer financial protection against compensation claims arising from injury or illness at work. Whilst the frequency of claims for injury and illness for office workers or working from home is low, but the potential severity of claims can be high. Employers liability is a compulsory under UK law and all insurers will provide limits of liability of £10,000,000. Read more

Public liability

If a member of the public is injured or their property damaged while at your premises or as a result of your business activities, they could seek to claim compensation. It is not a legal requirements to purchase public liability insurance, however it is recommend for every business to protect against any compensation awarded by a court. It's also worth noting, you can be held vicarious liability for the actions of your employees. Read more

Product liability

If you supply a tangible product with your professional service it's of vital importance that your arrange professional indemnity insurance and product liability insurance together. If you have seperate insurers for these covers you can find that each can deny liability on the basis the proximate cause relates to what is exluded - either arising from the product fault or the professional service.

Written by Simon Taylor

Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.

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