PROFESSIONAL INDEMNITY GUIDE
What Is Professional Indemnity Insurance and Who Needs It?
Professional Indemnity Insurance protects businesses against claims arising from professional advice, services, designs or specialist work.
It can respond where a client alleges that an error, omission, negligent act or professional mistake has caused them financial loss.
PI Insurance is particularly relevant to consultants, advisers, designers, contractors and other businesses whose clients rely on their professional knowledge or expertise.
WHAT SHOULD I CONSIDER?
Think about how your business operates day to day:
Do you provide advice, designs or professional services?
If a client relies on your expertise, Professional Indemnity may be relevant.
Could a mistake cause a client financial loss?
PI is designed for claims arising from errors, omissions or negligent professional work.
Do your contracts require PI cover?
Many clients insist on a minimum limit before work starts.
Do you undertake work with design responsibility?
Contractors and consultants can have PI exposure even if they are not a traditional professional practice.
Could a claim arise years after the work was completed?
PI is generally written on a claims-made basis, so continuity of cover matters.
Are you changing insurer or ceasing to trade?
Retroactive and run-off cover should be considered carefully.
What Does Professional Indemnity Insurance Cover?
Professional Indemnity Insurance is designed to protect a business if a client alleges that professional advice, services, designs or specialist work have caused them financial loss.
Claims can arise from mistakes, errors, omissions, incorrect advice or an alleged failure to meet the professional standards expected of the business.
Depending on the policy and profession, cover may include the cost of defending a claim as well as compensation that the business becomes legally liable to pay.
The exact cover varies significantly between insurers and professions, which is why the description of your business activities is particularly important when arranging PI Insurance.
Who Needs Professional Indemnity Insurance?
Professional Indemnity Insurance is particularly relevant where a business provides advice, designs, consultancy, specifications or specialist services that a client relies upon.
This includes traditional professions such as consultants, accountants, architects, engineers and surveyors, but PI exposures can arise in many less obvious businesses.
A contractor, for example, may take on professional responsibility if they provide design input, prepare specifications, recommend materials or advise a client how work should be undertaken.
Marketing businesses, IT consultants, recruitment companies, project managers, training providers and other specialist service businesses can also have a professional indemnity exposure.
The important question is whether an error in your professional work could cause a client or another party a financial loss.
Is Professional Indemnity Insurance Compulsory?
There is no general legal requirement for every UK business to hold Professional Indemnity Insurance. However, some regulated professions and professional bodies require their members to maintain PI cover, and minimum limits may be specified.
Even where it is not compulsory, clients frequently make Professional Indemnity Insurance a contractual requirement before appointing a consultant, contractor or professional adviser.
The amount of cover required may therefore be determined by your profession, professional body, client or individual contract.
What Does ‘Claims Made’ Mean?
This is one of the most important features of Professional Indemnity Insurance.
PI policies are normally written on a claims-made basis. This means it is generally the policy in force when a claim is made, or when a circumstance that could give rise to a claim is notified, that is expected to respond.
It is not necessarily the policy that was in force when the original work was carried out. For example, professional work could be completed in 2023 but a client may not discover an alleged error until 2026. Subject to the policy terms, it would usually be the PI policy in force in 2026 that would need to respond.
This makes continuity of Professional Indemnity cover particularly important.
Cancelling a PI policy simply because a particular project has finished does not necessarily remove the possibility of a future claim relating to that work.
What Is a Retroactive Date?
The retroactive date determines how far back your Professional Indemnity policy will consider previous work. A policy may provide full retroactive cover, potentially protecting eligible work undertaken before the current policy started, subject to the policy terms and any previous knowledge of circumstances.
Alternatively, a specific retroactive date may be shown on the policy. Work undertaken before that date may not be covered. This is particularly important when changing insurer.
A quotation may appear attractive on price, but if it introduces a new or later retroactive date it could remove protection for work previously completed.
When moving PI Insurance between insurers, the existing retroactive position should therefore be checked carefully.
Why Is Run-Off Cover Important?
Professional liability does not necessarily end when a business stops trading.
A client may discover a problem several years after the original advice, design or professional service was provided.
Because Professional Indemnity Insurance normally operates on a claims-made basis, a business that simply cancels its PI policy when it ceases trading could be left without insurance when a later claim arrives.
Run-off cover allows Professional Indemnity protection to continue after the business has stopped carrying out the professional activity.
The appropriate length of run-off cover will depend on the profession, contracts, regulatory requirements and the period during which claims could potentially arise.This can also be important when a business is sold, closes, retires from a particular profession or stops providing a particular professional service.
How Are Professional Indemnity Premiums Calculated?
There is no single rating method used for every Professional Indemnity policy. Insurers consider the scale of the business, but they are particularly interested in what professional work is being undertaken and how serious the financial consequences of a mistake could be.
Turnover or professional fee income is commonly used as an indication of the size of the exposure. However, two businesses with identical turnover may attract very different premiums if the professional activities they undertake are substantially different.
An insurer may also consider the largest individual contract or project, the type of clients being advised, overseas work, qualifications and experience, contractual responsibilities and previous claims.
The proportion of turnover generated from different professional activities can also be important.
For example, an insurer will view general management consultancy very differently from structural design, engineering, financial advice or other work where an error could potentially result in a substantial financial loss.
Why Does My Business Description Matter?
The description of your professional activities is one of the most important pieces of information provided to a PI insurer.
A broad description such as “consultant” may not tell an insurer enough about what the business actually does. The insurer needs to understand the advice, designs, specifications or services being provided and the extent of the professional responsibility being accepted.
A business may also evolve over time.
A contractor that originally only carried out physical work may subsequently begin providing designs. An IT business may begin offering consultancy. A property business may expand into project management.
Changes of this kind can alter the Professional Indemnity exposure and should be discussed with your broker.
Why Are Turnover and Fee Income Important?
Turnover or professional fee income helps an insurer understand the scale of the professional activity being insured.
If a business has grown considerably but continues to declare historic turnover figures, the insurer may be assessing a substantially smaller business than the one that actually exists.
Turnover should therefore be reviewed at each renewal, together with the split between different professional activities where applicable.
Accurate figures help insurers assess the exposure correctly and reduce the possibility of problems later if a claim occurs.
Why Do My Contracts Matter?
Professional Indemnity insurers are interested not only in the work you undertake but also in the responsibilities you agree to accept.
Contracts can contain indemnities, warranties, collateral warranties, limitations of liability and other provisions which may affect the professional exposure.
Particular care should be taken where a contract requires the business to accept a higher standard of responsibility than would normally apply.
For example, an obligation to exercise reasonable professional skill and care may be very different from guaranteeing that a particular result will be achieved.
Not every contractual liability will necessarily be covered by a standard Professional Indemnity policy.
For significant contracts or unusual contractual obligations, it can therefore be sensible to consider the insurance implications before agreeing to them.
How Much Professional Indemnity Cover Do I Need?
There is no single correct limit for every business. Common limits include £250,000, £500,000, £1 million, £2 million and £5 million, with higher limits available for businesses requiring them.
The appropriate amount may be influenced by the size and nature of your contracts, potential financial losses, professional body requirements and the minimum limits specified by clients.
The value of your professional fee is not necessarily the maximum amount that could be claimed.
A relatively small professional fee could still result in a much larger financial loss if an error affects a significant project.This is why the potential consequence of an error should be considered alongside turnover and contract values when selecting a limit.
What Is the Difference Between ‘Any One Claim’ and ‘Aggregate’ Cover?
The basis on which the limit of indemnity applies can be just as important as the amount of the limit itself.
An any one claim limit can potentially provide the full insured limit for each separate covered claim, subject to the policy wording.
An aggregate limit is the total amount available for all covered claims during the insurance period.
For example, under a £1 million aggregate policy, if £700,000 of the limit were used by one claim, only £300,000 could remain available for subsequent claims during that policy period.
PI quotations should therefore not be compared purely on premium and headline limit.
When Should I Tell My Insurer About a Potential Claim?
You should speak to your broker or insurer promptly if you become aware of a complaint, allegation or circumstance that could potentially lead to a Professional Indemnity claim.
You should not necessarily wait for a formal claim or solicitor’s letter. Examples might include discovering a significant error in your work, receiving a serious client complaint, being told that your advice has caused a financial loss or becoming aware that an important design or specification may be incorrect.
Claims-made policies normally contain notification requirements, so early notification can be extremely important.
What Should I Review at Renewal?
Professional businesses change, and Professional Indemnity Insurance should change with them.
At renewal it is worth reviewing your current turnover or professional fee income, the exact services being provided, the largest contracts undertaken, client types, overseas activities, contractual responsibilities and any claims or circumstances that have arisen.
You should also check the limit of indemnity, basis of cover and retroactive date.
New services, larger projects or changes in contractual responsibility can materially alter a Professional Indemnity exposure even where the name of the business itself has not changed.
Keeping your broker informed helps ensure that the policy continues to reflect the business you actually operate.
How Can Morris Perrin Help?
Professional Indemnity Insurance can vary considerably between insurers, professions and policy wordings.
Morris Perrin Insurance Consultants can help you consider your professional activities, turnover, contracts, limits of indemnity, retroactive cover, claims history and other relevant exposures before approaching suitable insurers.
The aim is not simply to obtain a PI policy, but to arrange cover that properly reflects the professional work your business undertakes.
Not Sure What Your Business Needs?
You do not need to know the name of every insurance policy before speaking to us.
Tell us what your business does and how it operates, and we can help you identify the areas that need consideration.
Call Morris Perrin Insurance Consultants on 01252 299094 or book a consultation.
Reviewed by Jeremy Perrin, Managing Director, Morris Perrin Insurance Consultants Ltd.
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