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Just because it isn’t a legal requirement, that doesn’t necessarily mean you will be able to operate without professional indemnity insurance.
This is because there may be institutions and regulatory bodies vital to your business that require you to take out a professional indemnity insurance policy as standard.
Even some clients may insist upon business indemnity insurance being in place before they will work with you. And this will be whether you run a big or small business, operate as self-employed or are registered as a sole trader.
Read on to find out more about what professional indemnity insurance is, which professions may need it, and what exactly it covers.
Professional indemnity insurance meaning
Professional indemnity insurance is a form of business liability insurance.
However, instead of covering personal injury or property damage, like public liability insurance or employers’ liability insurance, it is designed for when your client has suffered a financial loss due to your business services.
There are a range of situations where that could happen, including negligence, breach of confidence, loss of data, infringement of intellectual property, and mistakes made due to the dishonesty of your employees.
» MORE: Do I need business insurance?
What does professional indemnity insurance cover?
As mentioned, professional indemnity insurance covers situations where you are at fault for a financial loss suffered by your client, be that an individual or a business. As standard, if the claim is successful, it could pay for:
- compensation costs for defending a claim made against you
- legal fees incurred while defending the claim
Compensation in this instance will often take into consideration the financial loss incurred by the client.
On top of that, professional indemnity insurance may also include:
- run-off cover for claims made against your business after it has ceased trading
- the cost of recovering lost or damaged data or documents
- cover for new businesses you acquire while under the policy
Professional indemnity insurance example explained
The application of professional indemnity insurance is as wide and as varied as the number of professions that should consider it.
For example, it is quite clear how a professional indemnity policy would be appropriate for a solicitor or an accountant operating as a sole trader. Both give advice, which could be financially detrimental to the client.
It might be less obvious when it comes to, say, an interior designer. However, if a client is unhappy with your work, which they claim would cost money to rectify, a professional indemnity policy would pay for the compensation. This can even be the case if the client signed off on the designs in the first place.
Similarly, professional indemnity insurance would cover an architect if they produce a blueprint for a design that, once built, costs the client money to amend because the original specifications were incorrect or hazardous.
If you are a web developer, meanwhile, you run the risk of potential data breaches if the website is not secure enough, or causing loss of revenue if the site were to go down due to a coding error. In both situations, professional indemnity insurance would be used.
If you accidentally used a copyrighted image on the website, the costs associated with a copyright infringement claim would also be covered by professional indemnity insurance.
» MORE: A guide to small business insurance in the UK
What kind of businesses need professional indemnity insurance?
Typically, any profession or industry that offers advice, consultancy, specifications, designs or other expert services should consider professional indemnity insurance.
This means a professional indemnity policy can apply to numerous sectors, including but not limited to:
- accountants, and other financial advisers
- IT consultants
- business consultants
- chartered surveyors
- architects and interior designers
- graphic designers and web developers
- lawyers, and others in the legal profession
- freelance contractors or consultants
- healthcare professionals
- PR and advertising agencies
Depending on the industry, professional indemnity insurance can go from recommended to required, depending on the clients or bodies you deal with as a business.
For instance, it may only be a recommended policy for public relations professionals.
Architects, on the other hand, are required to take out professional indemnity insurance by both the Architects Registration Board and the Royal Institute of British Architects (RIBA).
The same goes for chartered surveyors and the Royal Institution of Chartered Surveyors (RICS), accountants or financial advisers and the Financial Reporting Council (FRC), and solicitors and the Solicitors Regulation Authority (SRA).
» MORE: Who needs professional indemnity insurance?
How much is professional indemnity insurance?
As with most forms of insurance, your professional indemnity insurance costs will be informed by a number of factors.
This includes the level of cover you wish to secure, the size of your business, the industry you work in, how much you charge for your work and any previous business insurance claims.
Insurers will also be interested in how ‘professional’ or well-managed your business is. They will want to know your qualifications and experience, the terms and conditions of your contracts, and the risk management you carry out for each job.
It is also worth noting that, like other types of business insurance, professional indemnity insurance is a tax-deductible allowable expense.
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