Professional Indemnity Insurance

Posted 13/03/2020

What is it?

Professional Indemnity Insurance protects you from financial losses which your client may suffer as a result of your professional negligence. This could include negligent advice or design work, an error or omission, or even a breach of your professional duties. The cover provided under the policy will typically cover the costs and expenses incurred in providing your defence along with the settlement of any damages or costs that may be awarded against you.

Why do I need it?

If you are providing professional advice (i.e. advice for a fee) your client is likely to take you at your word. However, sometimes the advice given can be negligent and your client may suffer a loss as a result, they may choose to recoup these losses by making a claim against you.

An example claim for bad advice could be seen in a business consultant who gave advice and guidance on changing a company’s GDPR or HR policies. The changes proved to be in contravention of the laws surrounding these matters and lead to legal issues, fines and potential loss of business.

If you are providing design work (anything from IT infrastructure to architecture) then you have a responsibility to the client to ensure that the designs are accurate and specified correctly. An architect might specify a material be used to complete a construction project, but the material proves to be unsuitable, the resultant claim to put this right would fall under a Professional Indemnity policy. Similarly, if an IT consultant specified some networking cabling, but this wasn’t adequate to their client’s requirements, the client may incur extra costs to put this right and make a claim against the consultant.

Very simply, if you’re providing a professional service and the work that you have done for your client leads to a financial loss to them due to your negligence, then a Professional Indemnity policy will help protect you.

Things to look out for

Professional Indemnity policies are on a claims made basis. A claims made policy will pay out on a valid claim made during the policy period, regardless of when the breach of duty or incident occurred. So you may have done something that lead to a claim 6 years ago, but your current policy would pick this up.

A claims made policy is in contrast to most other insurance contracts which operate on a claims occurring basis. A claims occurring policy will pay out on a valid claim where the work was originally done whilst that policy was in force, even if it has been reported several years later and the policy itself has been superseded by other insurances along the way.

The claims made basis that Professional Indemnity policies are based on mean that a ‘Retroactive Date’ is of vital importance. A retroactive date is the date that insurers are prepared to pay a claim from. For most businesses this will be the day their business started trading. Some insurers will have a retroactive date of nil or none, which means they will pay out on all valid Professional Indemnity claims, regardless of when they occurred.

Because a policy on a claims made basis will only pay out whilst the policy is in force, it’s important to consider how this could affect you if you are looking to stop trading or cancel your policy. The moment that you stop your professional indemnity policy, all cover ceases. You could consider a run off policy, which will provide continued insurance for a fixed period (usually 7 years) at a reduced rate. This protects you from the possibility of future claims even though you are no longer actively trading.

Calculating your sum insured

Calculating your sum insured is never an exact science and with Professional Indemnity insurance it’s even less so. You effectively need to know the maximum amount of financial loss you could cause your client and add to that the potential defence costs that could arise. Realistically, you’ll struggle to do this and our advices here is to limit your liability to a fixed amount within your written contracts and insuring for that amount. Doing this protects you and also gives your client the opportunity to challenge the amount if they feel it is not sufficient.

Within Professional Indemnity policies your sum insured can either be an aggregate limit or a fixed amount provided for each and every claim. With an aggregate limit, there’s effectively a pot of money that all claims are paid from throughout the policy period. With a fixed amount the sum insured would be reinstated for each claim. Although an aggregate policy is almost always cheaper, as it lowers the insurers potential exposure, it also exposes you to additional risk. You should think carefully about which type of policy would suit you and speak to your broker where necessary.

You should also bare in mind that some insurers include the defence costs within their sums insured, whilst others will pay these in addition. This is important to note, especially where you have limited your own liability via contract, as the defence costs will be taken from the total sum insured prior to any settlement, which could leave you underinsured.

How do I get it?

We can help with all aspects of Professional Indemnity insurance here at Drayton Insurance Services and have product experts ready to help. If you would like a quotation for your business, or simply some impartial and expert advice, please do not hesitate to contact us.

Article by Damien Ives, BA (Hons), Cert CII, CITIP
01603 264 356
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