Professional indemnity insurance is a type of business liability cover for those who trade their expert knowledge, advice, or professional service. It safeguards business owners from compensation claims from disgruntled clients who are unhappy with a service and say it has cost them money. This could be due to a mistake or negligence.
Professional indemnity insurance (also known as professional liability insurance) covers a legal defence cost plus the damages awarded to the claimant. Damages can cover loss of earnings, future loss of earnings, and the cost of repairing the issues caused by the policyholder. Some issues which professional indemnity insurance can cover include:
- Lost or damaged documents while a policyholder is responsible for them. This can also include sending a virus to a client, which wipes their systems.
- Defamation: If a client or third party accuses a policyholder of slander or libel.
- Confidentiality breaches: If sensitive information is shared. This could be by a dishonest employee.
- Breach of copyright: If intellectual property, trademarks or copyrights are infringed. For example, if a graphic designer used a licenced photograph without realising their contract for access had expired.
- Negligence: If incorrect advice or a mistake is made, or a policyholder does not deliver what was promised.
- Acts or omissions from subcontractors
Claims can be made long after the contract for the work has ended. Therefore, it is ill-advised to let a premium expire, and factor in a ‘run off’ time of about six years after a business ceases trading, according to experts.
What is professional indemnity?
Professional indemnity is the compensation paid to mitigate a loss a business has suffered at the hands of a third party it hired for professional advice or service.
If a business incurs costs or damage due to the actions of the third party they hired, they could sue the third party to meet the loss. These losses could be current or in the future, as well as the financial costs of putting right the mistake.
One example is an accountant makes a mistake in an organisation’s profit and loss account, making the client believe it has more money to spend than it actually does. It then needs to go into debt with costly interest rates to balance the books. The organisation could sue the accountancy firm for negligence, with damages awarded to cover the lost income from the interest payments as well as any other lost income to the business.
Another example is an interior designer being sued for a client’s claim they did not meet the work’s brief. Creative industries, where the work can be subjective, can often find themselves at risk of professional indemnity.
Who needs professional indemnity insurance?
Professional indemnity insurance is needed by a business or self-employed person making money by selling their expertise, advice, knowledge, or professional service. It is not just white-collar professions where an expert in the field is advising a business how to run, but can also be industries where someone is hired for their creative flair or workmanship.
It is not a legal requirement for any business to hold professional indemnity insurance. Still, some industry bodies may require it as part of their membership, such as accountants (see the Institute of Chartered Accountants in England and Wales) and architects (as part of the Architects Registration Board’s Code of Conduct), which a regulator governs. A client may also require it as part of the terms of the contract.
There are some industries where the likelihood of a client being unhappy with work or where the costs of putting right a mistake are high.
These include:
- Accountants
- Architects
- Financial advisors
- Insurance brokers
- Chartered surveyors
- Healthcare professionals
- Software developers
- Consultants
- Engineers
- Creative, marketing and design agencies and professionals
Many other industries may also consider professional indemnity insurance, depending on the work they do. These include tradesmen, construction professionals, event organisers, training, education and coaching professionals, recruiters, and marketing, advertising or public relations agencies, according to business insurance site NimbleFins.
How long does professional indemnity insurance last?
Professional indemnity insurance is usually renewed annually, like most insurance policies. However, the cover can last much longer so long as a policy is renewed on a ‘claims made’ basis, or with a retroactive date if the policyholder changes provider.
A ‘retroactive date’ can be applied if there has not been a break in coverage.
A ‘claim made’ basis honours claims made as far back as the first day of uninterrupted professional indemnity insurance, back to the retroactive date.
For example, if a business had a renewed policy every year since 2015, they would be covered for any valid claim made about an incident as far back as 2015. However, if there was a two-month gap in coverage between January 2017 and March 2017, the insurer would only cover incidents that took place since March 2017.
The same can be said for a retroactive date, which is the same principle and is critical when a business changes providers. This is why it is important to keep coverage up to date and not to let it expire.
If a business or professional operating solo ceases trading, for example, due to retirement, they are still advised to continue their indemnity insurance for a ‘run-off’ period.
It can often be a long time before the loss of income is felt by the client, for example, on a long-winded town planning project or because a consultant has produced a five-year business plan. Therefore any litigation may not begin until years down the line. If the business has ceased trading, they can still be liable for financial loss and would need adequate cover to safeguard against this. Professionals often advise cover for six years after trading ceases.
What is a retroactive date in professional indemnity insurance?
A retroactive date means an insurance provider will honour a qualifying claim against an incident that took place before the current policy term, stretching back as far as the first day of non-interrupted cover.
This means that if a claim was made about an incident that took place two years ago, but the current policy did not begin until one year ago, an insurance provider would still honour the claim if the policyholder had another policy at the time. However, there must not be a break in the cover. A claim would be invalid if the policyholder let the insurance expire for two months before renewing.
This retroactive assurance is vital when switching professional indemnity insurance providers because a client may not see a financial loss for many years after the advice or service was given.
The continuation of a policy is also vital, as an insurer would not honour a claim if there was a break in coverage, even if the business had another policy at the time.
Example: A consultant advised a business only to sell red clothing over the Christmas period. The client spends the next nine months planning for this. But it was a disaster, and it is not until the end of the financial year that the results of this bad advice can genuinely be calculated. It is then that the business takes action against the consultant. The consultant’s policy they had at the time of giving out the advice may have expired. But if they had renewed – with the same provider or a different one – with a retroactive date – they would be protected by professional indemnity insurance. However, if they had left a day between a policy ending and a new one beginning, the claim would be invalid, and the consultant would have to fight the dispute and pay any damages themselves.