What Does PI Insurance Cover?
PI insurance (short for professional indemnity insurance) covers a business that has made a mistake or provided negligent design, advice or service, which resulted in a loss to a client. According to NimbleFins, PI insurance can cover legal expenses to defend a claim and damages and costs awarded to a claimant if it is alleged a business’s designs, service or advice caused a client to lose money.
PI insurance is not a legal requirement, but regulatory or professional bodies may require it. It is also a smart risk management tool for businesses or sole traders that sell their expertise or service. A client could sue, claiming the advice or service given resulted in them losing money, or the service they provided did not meet expectations or the specification requested.
If a client makes a claim against a business, legal fees can cost thousands of pounds, and compensation can be even more if a company is found to be negligent. This is why professional indemnity insurance can be an important safety net.
Policies written on an ‘any one claim’ basis mean each individual claim has its own limit of indemnity, and a payout does not affect the amount of money that can be requested on a subsequent claim. An ‘aggregate’ indemnity policy gives a set limit for all claims made against a company during the period of cover.
Who needs PI insurance?
If a business or sole trader offers advice, knowledge, skills or professional services, they need to consider professional indemnity insurance.
Architects, accountants, consultants and construction workers are a handful of industries that should consider professional indemnity insurance. But also anyone who:
- Gives expert advice regarding professional services
- Handles sensitive data for a client
- Is a member of an industry regulatory body that requires professional indemnity insurance in terms of membership
- Is subject to scrutiny over quality or vision, such as creative industries like an interior designer.
- Is exposed to claims of professional negligence, e.g., giving incorrect advice
- Has a client who insists on professional indemnity insurance as part of the contract terms.
Professionals in many occupations would be especially wise to purchase professional indemnity insurance, including but not limited to:
- Financial advisors
- Insurance brokers
- IT specialists
- Healthcare professionals
- Planning and surveyors
- Risk management
- Design and construction
- Interior designers
- Coaching, training and education
In addition, there are other industries which give professional advice and should consider the premium, such as: PR agencies, advertising agencies, marketing agencies, business analysts, freelancers, event manager, mortgage brokers, recruiters, security consultants, software developers, tradesmen, writers.
How much is PI insurance?
The cost of PI insurance depends on the risk factors related to the industry as well as the size of the business.
The cost can be as little as £45 for a sole trader or freelancer in a relatively low-risk industry but could rise to thousands of pounds for a large business working on multi-million-pound contracts in a high-risk trade.
Insurers will consider the amount of money a client could be out of pocket for if the wrong advice was given or the likelihood of a client being unhappy with a service. For example, architects will generally pay more because a mistake in their work can cost thousands or even millions of pounds to repair.
Meanwhile, tax advising accountants, financial advisors, or insolvency practitioners could also make mistakes worth a lot of money or risk a client breaking the law.
The cost of the insurance can also depend on the provider’s current activities. If they have taken on many businesses in a similar profession, they may not feel like adding more risk to their pile; therefore, they will increase the cost of a premium to new business. There is nothing that can be done in this case, so it is worth shopping around to compare prices.
How much PI insurance do I need?
There are a few questions to answer before you decide how much professional indemnity insurance you need.
Firstly, is this required of your client or an industry body? If so, do they have state a minimum level of protection?
Secondly, there are a few different options to consider:
- What is the maximum compensation that could be awarded against you or the business?
- What legal fee limit do you want?
- How big are the contracts you are dealing with? The larger the contracts, the bigger the risks and financial penalties the client could face if something goes wrong.
- How much would it cost to put right a mistake you’ve made?
These questions may be difficult to answer, so many business owners use insurance brokers who can analyse the organisation and help calculate the minimum requirements.
It is worth noting that professional indemnity insurance may be denied if there has been a break between policies. For example, suppose a policy ended in September 2020 and resumed in November 2020. In that case, an insurance provider won’t cover you for an incident that took place in September 2020, even though the incident occurred when the policy was active. Had you maintained the cover – often even if it was with another provider – the insurance would still be valid for the retrospective claim assuming the policy had a retroactive date going back to the beginning of your cover.
It is also important to remember that it could take years before a client decides to take legal action against you. They may have taken your advice for a five-year plan, and if their profits tumbled, they may decide to take action after the five years are up. Therefore keeping your professional indemnity insurance up to date and not letting it expire is crucial. If you had cover while it happened, and you maintained a policy until the claim was made, professional indemnity insurance would still stand.
This isn’t to say a business must stay with the same provider. On the contrary, it is fine to switch insurers as long as they adhere to what is known as a ‘retroactive date’. This is the date since which a business has held an uninterrupted policy. That would mean that should a claim be made against a company for an incident that occurred before their current policy began, it would still be honoured so long as it happened since the retroactive date.
Because there can often be years between a service being provided and a compensation claim being made, a policyholder who is retiring or leaving the profession should consider a ‘run-off’ policy. This will protect them against new claims made after the official professional indemnity insurance expires because they are no longer working in the industry. Most experts suggest a six-year run-off which can be paid in a lump sum or annual policy.