As a consultant, IT contractor,or other type of small professional limited company owner, you will almost certainly have heard of professional indemnity insurance and may have been asked what level of cover you have by a potential client before being awarded a contract. But what exactly is professional indemnity insurance, what does it insure you against, and do you really need it?
What is it?
Professional indemnity insurance covers you if a client seeks compensation for losses they say they have suffered because of a mistake you made or from inadequate advice, materials or services you provided as part of your professional duties.
The cause of the claim can vary, as can the level of compensation the client is looking for, but either way, you could be faced with a hefty bill for compensation. And even when you feel you’ve done nothing wrong, defending yourself against such a claim is likely to prove expensive.
This is where professional indemnity insurance can help. It provides cover for any compensation deemed payable to your client and also the legal or professional costs for defending a claim made against you.
So what eventualities does PI insurance cover?
This type of policy can cover a range of risks, from professional negligence claims, loss of goods or data, breaches of confidentiality, and so on. Consider the following scenarios:
You provide a design for a project that is subsequently discovered to contain a number of flaws. This calls for expensive remedial work and also delays the project, incurring additional costs. In this instance, the client may seek compensation from you for the extra money this has cost them.
You or a member of your team are handling commercially sensitive documents on behalf of a client and inadvertently copy in a third party. This could prompt a breach of confidentially claim by the client or even a claim for loss of earnings, depending on what the third party does with the data.
If you or a team member lose documents, goods, or money belonging to a client, this could also lead to a claim for compensation. If you’re found to be at fault, the amount you have to pay in compensation can vary but will always take into account any financial loss the client has suffered as a result of your actions.
In some instances, professional indemnity insurance can also cover you for bodily injury to a third party if the injury is caused by your negligence while carrying out your professional duties. It can also insure you for damaging property, equipment or materials while working on behalf of a client.
Do you need professional indemnity insurance?
A number of regulatory and professional bodies and other business sectors will often require you to have a professional indemnity insurance policy in place before you can offer your services. This will apply to accountants, surveyors, engineers, architects, and other professions so if you work in this area, make sure you check what level of cover you need.
IT contractors, business consultants, recruitment consultants, fitness instructors, designers, and other types of freelancers may be required to show they have this type of insurance by the client before they are awarded a contract. The client may also specify that you have a minimum level of cover.
Even if you aren’t required by a regulatory body or client to have professional indemnity insurance, you may still want to take out a policy to protect your business and to reassure prospective clients that you are properly insured.
No matter how careful, attentive, and experienced you are, mistakes can happen and without the protection of professional indemnity insurance, you could have to pay out thousands in professional fees and compensation if a claim is made against you.
How much cover do you need?
Typically, professional indemnity insurance cover starts at £50,000 but can go up to £5 million or even more, depending on the type of contracts you are working on.
As stated above, clients may state the minimum level of professional indemnity insurance you need before being awarded a contract. If not, try and work out the level of risk you face and how much it could cost in compensation should you make a mistake.
Providers of this type of policy will also be able to offer guidance. In all instances, however, it’s important you ensure you are properly covered against potential compensations claims.
How to get a quote
For a PI Insurance quote, or to find out more about the range of insurance products available to limited company owners, visit our long-term partner Qdos.