In this Professional Indemnity Insurance guide, Black and White will look at all aspects of PII, including industries in which it is mandatory by professional bodies, as well as some example claims in order to provide a full understanding of this form of insurance.
Professional Indemnity Insurance (PII) could protect your business from legal disputes and accusations of negligence made by a client or third party, for reasons relating to a service that has caused them financial loss.
This insurance covers legal costs, expenses, and compensation paid to a claimant should your service be proven to be inadequate or negligent in any way, causing financial loss to the claimant.
Due to the subjective nature of negligence as a concept, failing to have professional indemnity insurance may leave you without access to the advice and legal defence you need in the event of an allegation and claim.
Is Professional Indemnity Insurance a Requirement?
While professional indemnity insurance is not mandatory for all professions within the United Kingdom, it is compulsory for members of various professional bodies. Financial advisors and accountant professionals are legally required to have this type of insurance, while it should also be considered by those working within the following professions:
Management and Business Consultants
Whether the focus is on marketing, training, or even teaching, advice is a key part of service for management and business consultants,
Accountants
One tiny miscalculation or mistake can cause numerous problems for accountants, especially if it involves financial loss for a client.
Architects
With many architectural errors emerging after work has been completed, it is appropriate for architects to protect themselves.
Designers
Ideas from concept recommendations are part of a professional designer’s role, meaning negligence, plagiarism or even breach of duty claims are possible.
Contractors
Contractors face risks from all angles, whether that’s the risk of injury or the risk of causing financial loss to a customer as a result of some careless advice.
Estate Agents
Mistakes may happen during the career of an estate agent, and you cannot be a member of the NAEA or ARLA without the adequate professional indemnity cover.
Operating Without Professional Indemnity Insurance: The Legal Risks
While claims usually emerge from clients, other third parties could also target you or your business with a claim.
Professional indemnity insurance can protect you against civil liabilities which include breach of duties, tort, and contract, with insurance policies available to cover as many areas as possible.
Contractual Liabilities
This variation of professional indemnity insurance is essential if you have a contractual relationship with your clients.
With close to all commercial contracts containing a clause relating to duties being carried out with ‘reasonable care and skill’, clients could make a claim against you or your business if they wish to prove that you have failed to deliver care and skill to a reasonable level.
Tort Liabilities
Should you not have a contractual relationship with your client, they may still make a legal case under tort law.
Torts cover both intentional and accidental acts, and usually occur on the basis of a tort of negligence and a tort of defamation.
Breach of Duties
Cover for breach of statutory duty is important in a number of industries, including accountancy, architecture, quantity surveying or estate agency, and may be covered by professional indemnity insurance.
Copyright, trademark, patent, plagiarism, and media rights can all fall under breach of intellectual property, and may also be covered by PII.
Breach of fiduciary duty completes the core elements of most professional indemnity insurance policies, which is when a client believes that you and your business are not acting in their best interests.
It is also possible to look at additional elements to potentially be added to your policy, including cover for the loss of documents, fidelity, and libel/slander.
Operating Without Professional Indemnity Insurance: The Financial Risk
Avoiding professional indemnity insurance leaves your business vulnerable to claims, with huge financial risks coming into place as a result. Claim costs can reach into hundreds of thousands, and even millions of pounds.
Many insurers offer policies providing cover from an indemnity limit of £50,000 as standard. At Black and White, we offer limits of indemnity online up to £5 million.
Tackling a claim without insurance is not something many businesses are able to survive, with costs of damages, expenses and legal defence all having to be sourced from the business.
What Does Professional Indemnity Insurance Cover?
Professional indemnity covers an array of potential risks for you and your business, including claims of:
- Breach of professional duty
- Negligent misstatement or misrepresentation
- Libel, slander or defamation
- Intellectual property rights infringement
- Breach of confidentiality
- Employee dishonesty
- Accidental transmission of a computer virus
Again, due to the subjective nature of negligence, you may not have access to the legal advice and guidance you may need when facing a claim.
How Much Professional Indemnity Cover Do I Need?
There is neither an exact method of calculating the level of professional indemnity insurance you need, nor a legal minimum requirement, and establishing the level of PII for you and your business’ needs can be complicated if you haven’t previously faced a claim.
Factors to consider when choosing cover include:
- The size of your business
- The size of the contracts your business deals with
- The legal costs you could potentially face
To ensure you are arranging the right level of cover, Black & White suggests that you consider discussing your business position with other professionals; particularly in the legal sector.
You may initially set-up a policy with a relatively small level of cover initially but may find that you need to extend that in the future, so you should make sure to check that you have that flexibility.
Your Professional Indemnity Policy Explained
Terms which you have not faced before may arise when you first apply for your professional indemnity insurance cover. Here we look at some of the key terms of your contract to provide you with an improved insight, so that you can decide the right options for your services or business.
The limit of indemnity attached to your policy is usually one of two options:
Any One Claim
Any one claim policies means that your policy will pay up to your indemnity limit on every occasion that a claim is made during a policy period.
As an example, if you have a £5,000,000 indemnity limit on your policy, every claim that you make can be up to the value of £5,000,000 as your insurer will consider each of them separately.
Aggregate Cover
This type of cover means that the indemnity limit of your policy is the limit for all claims accumulated and is the maximum amount you can be paid out, no matter how many claims are made.
Again, as an example, if you again have a £2,000,000 limit on your policy, this is the total amount which can be paid out in total in a policy period. So, should you have a claim for £1,300,000 against you, you will only be able to cover a claim of up to £700,000 in the future.
Any one claim policies are more expensive than aggregate cover, but are generally preferred by business owners as they provide a better level of protection for professionals.
What Is ‘Run Off’ Cover?
Though the thought of a business no longer functioning is not a welcome one, it is practical to consider the fact that you would still be liable for any claims of negligence – even if your business is closed. “Run off” cover provides protection for your company after is has ceased trading, and is particularly important to consider for those in business nearing retirement.
What Does ‘Claims Made’ Mean?
Professional indemnity insurance policies work on a ‘claims made’ basis, giving you cover for claims made and notified within the period of insurance.
This means that you can expect to be covered if a negligent act occurs and you inform your insurance company during the insured period. However, your cover will end if you choose to cancel or not renew your policy, even if a claim is made during the period you were insured.
Retroactive Insurance Coverage
Many insurers will give you the option of a retroactive date when you are looking to take out a new policy. This policy variation will mean you are covered for work completed during the period previous to the date the policy is taken out.
For example, 12 months of retroactive cover will protect your business against claims related to work completed in the 12 months previous to policy inception.
How To Handle A Professional Indemnity Insurance Claim
Though anyone can theoretically make a claim against you, it would most likely be a client. As explained earlier, a claim will emerge when a client suffers a financial loss, is dissatisfied with your service, there has been a significant mistake, or you have failed to deliver what was agreed.
Your insurer will want to know about any allegations made against your business, so it is important to contact them to discuss the situation and provide accurate information. This means they can prepare for the possibility of the allegation becoming a full claim in a swift manner.
It is your responsibility to be transparent and provide your insurer with all of the required information they need to defend any claims against you as soon as possible.
Key Things To Remember
Professional indemnity insurance may be a choice, but it is something which should be considered seriously by businesses and their owners. Here are a number of factors to consider when weighing up whether or not it is a good option for your business.
- Assess the level of cover your business requires.
- Make sure that the business has cover at the level which works for your business.
- Keep good records and have contracts in place in order for your insurer to have the appropriate information as soon as possible should a claim be made against you.
- Check the terms of your policy in depth to ensure that you are getting the level of cover you both want and need.
- Some insurers offer policies combining both professional indemnity insurance and public liability insurance, so it is worth researching to discover the options available to you.
You want your business to succeed through excellent service and consumer satisfaction, but there could be disgruntled customers and claims along the way. If found to be in the wrong, professional indemnity insurance protects their interests, covers damages, and protects your business’ interests, reputation, and financial stability.
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