A guide to Professional Indemnity Insurance

21/03/19

Professional indemnity insurance or PI insurance covers legal costs and expenses incurred in your defence, as well as any damages or costs that may be awarded if you are alleged to have provided inadequate advice, services or designs that cause your client to lose money.

Who needs Professional Indemnity Insurance?

Professional Indemnity insurance is recommended if you are providing advice or work where financial or reputational damage could occur and protect yourself against any claims made against you and the legal costs of defending yourself.

If your business is based around providing an expert service such as an architect or accountant you could be liable for making a mistake in designs, plans or calculations. You could also be liable when providing professional services/advice to friends or family, even free of charge, as this can give rise to a duty of care.

Another reason businesses take out PI cover is that it was requested by a client as within their supplier agreements. Many clients, especially within the construction sector, will insist that you have professional indemnity insurance in place before you can start working for them.

Finally, some professional body or industry associations require you to have professional indemnity insurance. These include

  • In England and Wales, the SRA requires all practising Solicitors to have professional indemnity insurance from an insurer who is signed up to their Qualifying Insurers Agreement.
  • PI is required for financial firms, such as accountants or financial advisors that conduct any work that falls with the Insurance Distribution Directive. The FCA requirements are that they have a medium cover of €1,250,000 for a single claim and €1,850,000 in aggregate.
  • The Architects Registration Board expects architects to hold professional insurance indemnity as part of their code of conduct.
  • Rule 9 of the Royal Institution of Chartered Surveyors’ Rules of Conduct for Firms requires surveyors to have adequate and appropriate professional indemnity insurance cover. The level of indemnity depends on the firms turnover with a firm earning:
    - £100,000 or less requiring £250,000;
    - £100,001 to £200,000 requiring £500,000
    - £200,001 plus requiring £1,000,000
  • These limits are regularly reviewed so you will want to check the RICS website before taking out any PI policy.
  • Architects, surveyors and engineers may also want to consider any liability required in relation to Building Regulation / Health and Safety legislation.

In the past few years, there’s been a marked increase in the number of Professional negligence claims. The combination of increasingly complex of work, reliance upon professional advice, an urgency to turnaround work faster and a raised awareness of legal rights have all contributed to the current climate. In addition, in times of economic uncertainty, any losses suffered can feel more significant and apparent.

What does Professional Indemnity Insurance cover?

Professional Indemnity insurance covers legal costs and expenses incurred in your defence, as well as any damages or costs that may be paid out. This means you are covered if you’re alleged to have provided inadequate advice, services or designs that cause a client to lose money. For example; a solicitor may miss an important time limit or fail to advise properly on a settlement offer.

Some Professional Indemnity policies will also cover specific errors and mistakes you make such as losing client documentation/data and unintentional breaches of confidentiality.

  • Breach of duty – is where a company, professional, group or individual does not meet their duty of care.
  • Breach of confidence – this is where information is given out or revealed from one party to another without permission or consent.
  • Run-off cover – this protects a business after it ceases trading against any historical liabilities
  • Defamation – refers to any slanderous or libellous claims made.

See our article on key PI policy terms to be aware of for further details

What are the benefits of Professional Indemnity Insurance?

We all make mistakes, it’s just human nature, ensuring your business against these mistakes can help mitigate the risk and prevent significant financial losses.

Even if you didn’t do anything wrong, the cost of defending your reputation can be steep and Professional Indemnity insurance can make sure that these costs don’t harm your business.

If the worst does happen to have cover place will save you valuable time and reduce the interruption to your business that would coincide with deal with claims directly.

In addition, having protection in place demonstrates to your clients that they’re protected, and the professional service provided by your insurer will help reduce any friction and repair the relationship.

Professional Indemnity Insurance claims examples

The most common examples of claims are when mistakes are made that lead to a client suffering a financial loss. An example claim would be if an accountant miscalculated their client's tax affairs resulting in them being fined. The accountant could face a claim from the client to cover the cost of the fine and any resulting financial impact. Another example would be if a construction project had to be restarted due to inaccurate drawings. The architect who provided the plans would be liable for any expenses incurred including the costs of any new materials and additional work required.

While PI claims are often centred around ‘bad advice’ or mistakes, professional negligence is wider than this and a claim could be made against you for failing to meet your duty of care or performing reasonable standards required your profession.

In an often referred to legal case Peter Burgess and Lynn Burgess v Basia Lejonvarn case, even though Basia Lejonvarn was offering her service to help some friends as a favour the Court did find that Mrs Lejonvarn did owe a duty of care to Mr and Mrs Burgess to exercise reasonable skill and care in the provision of professional services acting as an architect and project manager.

How much does Professional Indemnity Insurance cost?

A professional indemnity policy can vary greatly in price based on your individual risk profile. For smaller professional firms it could be a few hundred pounds while within the legal sector though it could run it’s the tens of thousands.  If you would like to learn more about what influences professional indemnity premiums read our latest PI market update.

How do you get a Professional Indemnity Insurance quote?

How you get a quote for Professional Indemnity insurance depends upon the size of the organisation and the type of coverage you’re looking for.

For a larger organisation with more specialists needs working with an insurance broker is the more likely route as they will have access to markets not available to them directly and are able to provide risk management advice that would make you a more attractive proposition for insurers.

Small businesses have three options, they can use an online aggregator to find a quote, instruct an insurance broker to get a quote on their behalf or go directly to an insurer. Each has its pros and cons. With an online aggregator, it’s down to the business owner to compare the different policies and make the right choice, this can be quite difficult but there are articles/guides like this one that can help.

Some business owners prefer to go directly to an insurer, they may have a dedicated account manager with an existing provider who could help but not all insurers work directly with clients and can only be accessed through a broker. When going direct comparing different policies can be quite a time-consuming task and like an aggregator, you're left with comparing and assessing the options.

An insurance broker’s job is to find you the right cover based on your needs. They will ask you about various aspects of your business like the type of work you conduct, your past claims history and potential risks. They can help you find a more bespoke solution than an aggregator with covers and clauses relevant to your business/sector.

For further information on the issues covered by this article visit our Professional Indemnity Insurance page

Whilst care has been taken in the production of this publication and the information contained within it has been obtained from sources that Aon UK Limited believes to be reliable, Aon UK Limited does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the publication or any part of it and can accept no liability for any loss incurred in any way whatsoever by any person who may rely on it. In any case any recipient shall be entirely responsible for the use to which it puts this publication.

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