What Is Professional Indemnity Insurance and who needs it?
Professional Indemnity Insurance (PI or PII) protects you and your business due to professional negligence or a breach in your professional duties. For example:
- Accountants report financial information to HMRC;
- Architects measure, draw and manage building projects;
- IT consultants install, maintain and support computer systems; and
- Business coaches guide business owners
These are just some of the professions that provide professional services to their customers. However, if:
- The accountant reports incorrect tax information to HMRC;
- The Architect incorrectly measures a staircase;
- The IT Consultant doesn’t update the security system properly; or
- The Business Coach provides bad advice
They would all be in breach of their professional duties to their customers. This is especially bad if their customers suffer financially because of the breach of their professional duty and this is where Professional Indemnity comes in to protect you and your business. Defending these claims can be time-consuming and expensive.
Many professions are required to have professional indemnity insurance in place, such as Accountants, Mortgage Brokers, Architects, Engineers, Insurance Brokers, IFAs, Solicitors and Legal Advisors to name but a few. It’s also recommended that professions that are not regulated by a professional body also have professional indemnity insurance, such as Business Coaches and IT Professionals.
So, ask yourself – “Do others rely on the professional services that I provide?” if the answer is “Yes”, it probably means that you need professional indemnity insurance.
Remember, if you are in a position where people rely on your professional judgement, whether you are being paid or not, you owe those people a duty of care.
If you are still unsure if professional indemnity insurance is needed for your business, please give us a call and we’ll be happy to provide you with some free advice.
How can you become liable?
If you trade as an individual, you should have a policy in your name and any claims that fall against you, should be picked up by the policy. If you were to partner up with an additional person, it’s usually recommended that they also have their own insurance in place. You could add that person to your policy but that would mean that you would need to declare any claims that your partner made under your policy to any future insurers, even if you went separate ways.
With Limited and Limited Liability Partnerships, you don’t need to declare every employee to your insurers but any claim or circumstance that comes in is usually made against the Limited/LLP entity and not the directors/partners of the firm directly. This will mean that all directors/partners are equally liable for any claim that is made against the firm.
You do need to tell the insurers who the directors/partners of that firm are and if there is a change in these people during the policy term.
If the firm or the individual ceases to trade, or a partner/director leaves the firm, you can still be liable for the past work that has been done. As a general rule, you can be liable for up to six years for negligence claims but in some cases, this can be as high as 12 years for speciality claims.
What features do you see on a Professional Indemnity Policy that you won’t see elsewhere?
Professional Indemnity insurance works on a “Claims Made” basis. Unlike liability policies which operate on a “Claims occurring” basis, “Claims Made” means that claims for actions from the previous year’s work, will be met under the currently active policy.
So, if you did work for a client in year 1 but were not notified of a negligence claim from the claimant until year 3, the policy in place in year 3 is the policy that will protect you. The insurers providing cover in year 3 will expect that you held a policy in place when you did the work in year 1 and you held that policy in place continuously since that time.
You don’t need to stay with the same insurer but when you move from one insurer to another, you need to ensure that there is adequate “Retro-Active” cover in place. This can appear as a date on your policy schedule (usually meaning that cover will only apply from that date to the current date). However, many insurers will provide a date of “None” which often means that they are providing full retroactive cover.
This may seem a bit backward but the term “None” here will usually mean that provided you had a policy in place when you did the work and that you held a policy in place since that date, then the insurer is providing full cover for past work (full retroactive cover). I.e. there is no limitation date.
What can professionals be liable for? (Reword Question)
If you or the business fails to exercise reasonable care and skill during the carrying out of professional duties, anyone can claim you or the business. If it is proven that you or the business:
- Owed a duty of care to the claimant;
- Failed to uphold/Has breached that duty of care; and
- Caused the claimant financial loss as a result of that breach in your duty of care
Under common law, a third party will have a valid claim against you.
If a claim is brought against you due to a breach of contract, it can be easier to defend but sometimes cases can be “dragged” out due to how the language of a contract could be interpreted.
If you are found to have not been negligent, your professional indemnity policy will usually pay for your defence costs which can run into hundreds of thousands of pounds.
On the other hand, if you are found to have been negligent, your policy will also need to pay for the claimant’s damages owed to them AND their legal costs.
What are the main limitations of cover?
Professional Indemnity Policies are limited to two main capacities:
- Any One Claim – If your policy is written on an “Any One Claim” then each and every claim that you make under the policy is limited to the indemnity sum that you purchased – say £1,000,000. The defence costs are usually covered in addition to this limit
- In the Aggregate – If you have an aggregated limit of cover, then your policy is limited to the indemnity sum that you purchased for the entire policy duration. This limit can also apply to include defence costs
If you have 3 claims at £750,000 each, with defence costs at £300,000, “Any One Claim” policy will pay for all three claims in full as the policy limit is £1,000,000 for each and every claim. The total the policy would payout throughout the policy period would be £3,150,000.
Using this example on an aggregate basis, the maximum sum the policy would pay is £1,000,000 across the entire policy period. The additional £2,150,000 would need to be paid for elsewhere.
As you can see from the above example, the policy written on Any One Claim basis provides superior cover and is usually the recommended cover.
What’s the best limit of cover I should have?
If you’re a member of a regulatory or membership body, some of them advise a minimum limit of cover that you should purchase. It’s important to remember that these are minimum limits and that each business should evaluate its risk independently.
Take insurance brokers, for example. If an insurance broker recommends a household policy to a customer to protect their home for a rebuild value of £3,000,000 but the actual cost to rebuild their home is £4,000,000, their biggest exposure* could be the cost of rebuilding that property (i.e. £4,000,000).
However, at the time of writing, the Financial Conduct Authority (FCA) requires insurance brokers to carry a minimum limit of:
1) for a single claim, €1,300,380; and
2) in aggregate, the higher of:
- a) €1,924,560; and
- b) an amount equivalent to 10% of annual income (this amount being subject to a maximum of £30 million)
From the exchange rate from pounds to euros, having a £2,000,000 Any One Claim policy would satisfy the regulatory requirements but it would not cover the firms overall financial risk. If the policy purchased was an aggregate policy, once the claim had been made against the Insurance Broker, there would be no cover left for any subsequent claims meaning the firm would be uninsured and trading against the regulators minimum insurance requirements.
For specific professions (Architects, Accountants, Mortgage Brokers etc…) we go into detail on our website in respect of the cover their regulators require them to have. It’s not a one size fits all situation and our experienced and expert team are on hand to give you some bespoke advice.
*This does not take into account the principles of average/underinsurance. If you would like to know more, please contact us for details.