If you provide professional personal services to clients, you will almost certainly have heard of PI 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 professional indemnity insurance?
Professional indemnity insurance protects you if a client claims they lost money because of you. It covers your legal costs and any damages or compensation the court orders you to pay if you’re sued for:
- Negligence, for instance because you gave the wrong advice or installed a piece of hardware incorrectly
- Breach of copyright or confidentiality, whether this is intentional or not. You might breach confidentiality unintentionally by copying someone you shouldn’t in an email by mistake, for example
- Loss of data or documents
- Defamation. This is where a client claims you said something that has harmed their reputation
- Some other breach of your contract, for example a missed deadline
Who should buy professional indemnity insurance?
You should buy professional indemnity insurance if you:
- Are a contractor, a freelancer, or otherwise self-employed
- Do business through your own limited company. As a rule, umbrella companies provide professional indemnity cover as part of their service
- Give your clients advice or provide them with a professional service, for instance, because you’re an IT or marketing consultant
- Create designs as part of your service, for instance, because you’re an architect or interior designer
Why do I need professional indemnity insurance?
Often, buying professional indemnity insurance will be a requirement of your contract. And the client may ask for proof that you have it, such as a copy of your policy schedule. Some professional bodies may also require you to have professional indemnity cover.
That said, it’s worth buying professional indemnity insurance even if you don’t have to, for two reasons:
- For your peace of mind
- To protect your business from potential financial ruin
For peace of mind
For a client to win a court case, they’ll usually need to prove that:
- Your behaviour fell short or went against what the law or your contract expected of you
- They lost money as a result
Your client won’t win unless they can reach the standard of proof the court expects. But a weak case doesn’t mean they won’t sue if they’re unhappy. And while you may eventually win, you’ll still have to go through the ordeal of getting a solicitor, going to court and paying fees.
To top it off, clients have up to 6 years to sue for negligence, breach of contract or other damages and up to 1 year to sue for defamation. This means you could get slapped with a court case long after a project is done and dusted.
Professional indemnity insurance won’t stop clients from suing you. That said, you’ll be safe in the knowledge that there’s someone to turn to for help should the unthinkable happen.
Safeguarding your finances
Let’s say your client is claiming your actions cost them £100,000. Because the claim is between £10,000 and £200,000, it’ll cost 5% of the amount — that is £5,000 — to file the lawsuit. This is called the issue fee.
Your client pays the issue fee at the start of the proceedings. But if you lose the case, the court may order you to pay it back to your client. And that’s in addition to:
- The £100,000 in damages your client originally claimed (though the court might decide to award a lower sum)
- Interest, if the court decides to charge it
- Any other court fees, for example, the cost of appointing expert witnesses
And then, of course, there are the solicitor’s costs to consider. Alongside your own solicitor’s fees, the court may also order you to pay part (or all) of your client’s solicitor’s fees.
You don’t need to be a maths genius to see how this could put you out of business. Professional indemnity insurance will cover these costs and, so, prevent this from happening.
When should I buy PI insurance?
The simple answer is: as soon as possible. Been in business for a while but never bought professional indemnity insurance? You can still protect yourself against claims for past work by buying retroactive cover.
What is retroactive cover?
Retroactive cover allows you to claim if you’re sued for something you did before you bought the policy.
Let’s say you take out a professional indemnity policy on 20 April 2019. A client sues you for damages they claim they suffered as a result of a job you completed on 10 March 2018.
Since you weren’t insured in March 2018, you wouldn’t be covered. Which means your company would have to pay legal costs and any damages you’re liable for. But if you take out retroactive cover, your policy will pay your costs, even though you bought it after the fact.
To buy retroactive cover:
- Make sure you have no outstanding claims or knowledge of potential claims (for instance, a client who’s made it very clear they’re not happy with your work). Your policy will be invalid if you don’t tell your insurer of any claims you knew or should’ve known about
- Tell your insurer you want the cover to start on a certain date in the past. This is the retroactive date
- The retroactive date could be the date you registered your limited company. Or the date when you started work on your first client project
- Pay the policy premium and cover will start
What about future claims if you stop working or retire?
Professional indemnity insurance only covers you if it’s currently in force. So if you stop your policy today and get sued for something you did in 2018, you won’t be covered, even though you had an active policy in 2018.
Clients have up to six years to sue you for negligence, breach of contract or other damages. So if you’re closing your business or retiring, it’s worth investing in a professional indemnity policy that protects you from your historic liabilities. This is called run-off cover.
What is run-off cover and how does it work?
Run-off cover protects you if a client sues you for damages arising out of a past job, but not for damages arising out of future jobs.
Let’s say you close your business on 4th May 2019. You tell your insurer you’ve stopped trading but would like to have run-off cover in place.
Your run-off policy would cover you if you’re sued by a client you worked with in January 2019. However, it won’t cover you if you’re sued in relation to a job you do after 4th May 2019.
How long should I keep buying run-off cover for?
The simple answer is, it depends. Clients have up to six years to sue you. But the six years start running from the day the client suffers the loss or damage, not from the day you finish the job. This means you could get sued 7 or even 12 years later.
For this reason, it’s worth getting advice from a solicitor before stopping your run-off cover.
How much does professional indemnity insurance cost?
Well, how long is a piece of string? The cost of your policy will depend on a number of factors, including:
- The level of cover. A policy that covers you for losses of up to £250,000 will be cheaper than one that covers you for losses of up to £1 million
- Your excess payment. This is the amount of money you have to pay out of your own pocket when you file a claim. Most policies will have a standard excess. That said, some insurers will give you the option of paying a higher excess in exchange for a lower premium
- Any add-ons. Do you also want public liability cover? Or some other additional extra? This will raise your premium
- The type of business you run (some are more at risk of being sued than others), the size of your turnover, whether you have any employees and whether you’ve had any claims in the past
- Your insurer. Some insurers are more expensive than others. That said, a cheaper premium will usually mean compromises in the form of more limited cover, a higher excess payment or a not-so-stellar reputation for claims handling
On the bright side, any insurance you buy for your business is an allowable business expense. This means you’ll pay less corporation tax.
How to buy professional indemnity insurance: 4 tips to get you started
Step 1: How much cover do you need?
Your contract may specify the least you have to be covered for. But, depending on the nature of your business, you may opt to buy more. It’s usually a good idea to get cover for at least £250,000 so you’ll have enough for a potential claim, legal fees and any unexpected costs
Step 2: Do you need public liability, business liability or some other type of insurance?
Many insurers offer discounts if you buy multiple policies. For this reason, bolting on additional cover to your professional indemnity policy may work out cheaper than buying separate policies from different insurers
Step 3: Pick a reputable insurer
Not all insurers are created equal. You’ll want a provider that has a reputation for handling claims efficiently and, more importantly, understands how your business works. Looking for an insurer that specialises in contractors and freelancers is a good starting point
Step 4: Read the policy document carefully before you buy
Make sure you understand exactly what’s covered and, more importantly, what isn’t before you buy. You want to keep your premium reasonable. But you also want to pay as little as possible out of your own pocket in the event of a claim
Not sure where to start looking for top quality professional indemnity insurance?
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.
Visit Qdos for an online quote. IR35 cover also available.
Specialist fixed-fee service from Intouch - just £105 / month.