Professional indemnity insurance (also known as professional liability insurance) is a large, rapidly growing sector of the commercial insurance market, with many insurance companies actively fighting for market share and offering different types of products both online and off-line.
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Reading: What does pi stand for in insurance
It’s important to understand professional indemnity insurance so you can make an informed decision about which product is right for your business. Here we explain professional liability insurance, covering some of the most important points to consider.
This guide may also be distributed to your company’s directors and senior managers for general information and risk management purposes.
- what is professional liability insurance?
- how much does it cost?
- where can I buy professional liability insurance?
- how is the premium calculated?
- what does the policy cover?
- why is it important for companies?
- does the law require a professional indemnity insurance?
- how does it work?
- how much coverage is required?
- who needs professional indemnity insurance?
- when is it needed?
- what is settlement coverage?
- what does professional liability insurance not cover?
- glossary of some important terms
what is professional liability insurance?
To explain professional liability (PI) insurance, you need a clear definition of what it is. In essence, it is an insurance product designed for professional companies and individuals that covers them in the event that certain errors occur in the exercise of their activity. the available policies mainly cover professional negligence, errors or omissions, breach of professional duty and civil liability.
This type of insurance allows professionals to work without fear of being sued by a client or a third party for problems that occur as a result of their professional activity. In short, it allows professionals to carry out their work with greater confidence and peace of mind.
Professional liability insurance was created to provide much-needed financial protection against personal risks and losses to which professionals were highly exposed. The origins of this insurance date back to London in the 18th century. at the time, established professions such as accountants, lawyers, and architects were listed with ‘unlimited liability’ as a guarantee of the quality of their work.
When they made a mistake, they paid any compensation to their client out of their own pocket, limited only by the value of their assets. as such, they could literally ‘lose the shirt off their back’ if their mistake was significant enough. so creating insurance to protect against these losses was a much-needed solution.
Today, the increasing reliance of businesses on the contracted services provided by many occupations has greatly increased the scope of the term ‘professional,’ and any person or business that offers specialized advice or services is considered a professional. Risks are as important as ever and mistakes can still cause a professional to lose their business and reputation without adequate professional indemnity insurance.
how much does professional liability insurance cost?
the cost of coverage will depend on the type of profession, the annual turnover, the history of claims, etc. for example, a financial advisor is considered high risk and will pay more than a lower risk recruiting consultant.
The rates for this insurance generally range between 0.25% and 5% of commission income or annual billing, depending on the factors usual risk factors and market competition. but rates can also be higher or lower than this.
Minimum premiums will also apply and will vary between insurers. the ‘minimum premium’ is the insurance company’s starting point for insuring a risk, and can vary significantly between companies. for example, the minimum premium could be £100 or £1,000 depending on the insurance company.
Insurance premium tax of 12% is also paid on insurance premiums, but the premiums are not subject to VAT.
Where do I buy professional liability insurance?
Professional indemnity policies are obtained mainly from specialized insurance brokers like us. Due to the complexity of the risks and the wide range of different products available, going to a broker with the right experience is invaluable in ensuring you buy the right coverage at the right price. A broker will understand your business needs and help you determine potential areas of risk that you may not have identified yourself.
For a professional indemnity quote today, please complete the quote request box on this page or call us on 0345 251 4000.
how is the premium calculated?
The premium calculation for a professional indemnity policy varies by profession, as some professions are much higher risk than others. Just like an auto insurance policy, there are many factors that go into the cost of the policy, not just the amount of coverage or the required indemnity limit.
The size of a company, its turnover and its professional activities is a crucial part of any calculation that is made, along with the claims that have already been made. The greater the exposure to a potential claim, the higher the cost involved in purchasing any insurance.
What does professional indemnity insurance cover?
It simply covers the cost of mistakes made while providing professional services. In today’s busy business world, anyone is at risk of making a mistake no matter how professional or diligent they are. some errors are minor with little or no cost or financial consequence. however, others can be much more serious and not having adequate PI insurance coverage can financially destroy a company, its directors or partners.
Depending on the contracted policy, it will cover negligence, errors and omissions, breach of duty and civil liability. Professional indemnity insurance should also cover liabilities that are the result of negligence, such as business interruption and significant legal costs incurred from being sued.
Some policies also offer protection for business or financial loss caused by defamation, lost paperwork, dishonest employee conduct, and unintentional breach of trust.
In addition, the insurance will often cover any possible infringement of intellectual property rights or copyright, something that is of great interest in the creative industries.
how important is professional liability insurance in business?
Having an insurance policy that covers a professional for their work is important because it allows them to offer services without having to factor in the potential additional cost of any errors they may face in the future. In addition, a professional indemnity policy can also cover legal costs and expenses that may be incurred as a result of a legal case against a professional for their mistake.
Without this insurance, professionals are exposed to much higher business risk and may need to increase their prices to account for it. but with this insurance, they are protected against many undesirable business outcomes and are able to operate more competitively as a result.
Does the law require professional indemnity insurance?
It is not a legal requirement, but most professional institutes and associations require their members to have some form of professional civil liability insurance and regulate it through their rules and regulations. not having the insurance is usually a serious disciplinary offense that can lead to a company being fined or closed by its regulator.
In many unregulated services, such as IT and technology, professional indemnity insurance is not a regulatory requirement. however, those professionals who are not required to have this type of insurance should still hire it. Management, business, and marketing consultants are generally not required to receive professional indemnity, but often still do to protect themselves from potential liability for legal fees or compensation payments.
many large companies and government departments also insist that any service provider they work with must have pi insurance and will require evidence.
Other occupations that are often disguised with their professional services include IT professionals, recruitment consultants, graphic and interior designers, personal trainers, instructors, teachers, and private tutors. however, the list is much more diverse and extensive than just these professions.
How does professional liability insurance work?
A professional liability insurance policy can be an individually assessed and custom-designed product, or it can be an automated product that is simply and quickly purchased online. Ideally, the policy wording will be written in such a way as to meet all the specific needs of the policyholder.
For example, an inadvertent breach of a written contract related to the supply of equipment or software may be a major issue for an IT professional, but a much smaller issue for a surveyor. Likewise, damage limitation coverage is likely to be of much greater interest to professionals working in marketing roles than to private guardians, for example.
with the relevant business covered at the appropriate level, all that needs to be considered is the excess to be applied. Like other forms of insurance, this is the initial amount of a claim that is not covered. the higher the excess level, the lower the policy premiums, generally speaking.
How much professional liability insurance coverage do I need?
When purchasing any form of insurance, whether for business or personal coverage, it’s important to carefully assess how much coverage is required. this varies from company to company, and when it comes to professional indemnity insurance, it can be difficult to calculate how much coverage will be adequate for the company’s needs.
It often boils down to assessing the amount of financial damage it could cause by looking at the ‘worst case scenario’, i.e. what is the worst thing that could go wrong?
There is no single solution or policy that fits all circumstances. When considering what level of professional indemnity insurance to buy, consider the potential financial power of your clients and how much recourse they might have if they had to make a claim against you.
The other thing to weigh is the likely cost of legal fees you could face without insurance, should you need to defend yourself. this varies from industry to industry, but keep in mind that costs tend to increase in general for problems that are complex to solve.
read our helpful guidance note on this topic: your compensation limit.
Who needs professional liability insurance?
There are many professions that need to have up-to-date professional liability insurance policies in order for their professional bodies to allow them to practice. these include lawyers, accountants, architects and financial advisors. Chartered surveyors and some healthcare experts are also required to carry PI insurance by their respective professional bodies.
Outside of these areas, there are many professionals who choose to protect themselves with professional liability insurance even though their business organizations do not require it. These include advertising professionals, business consultants, designers, and public relations professionals, among others. in short, anyone who offers professional services should wear it.
When is professional liability insurance required?
Although professional liability insurance is not a statutory legal requirement in terms of the law, certain professions are regulated by their respective professional bodies, and may require individuals or organizations to take out a professional liability policy. For professionals who need to comply with all the rules of their organization to be able to practice legally, contracting or renewing their professional liability insurance becomes a de facto legal requirement. in fact, not having insurance can, in certain circumstances, make a legal case against a professional possible in its own right.
What does professional liability insurance not cover?
Although policies vary, there are several limitations on the kinds of things professional indemnity insurance will cover. These tend to include matters such as employers’ liability, auto insurance matters, product liability, and insolvency or bankruptcy. however, other types of insurance policies can be contracted for these examples, if desired.
Professional indemnity insurance also rarely covers things like bodily injury, fines and penalties, or financial loss due to war or pollution and radioactive contamination.
There is a financial limit that a policy will pay in the event of a successful claim, this is called the indemnity limit. some professional bodies set a minimum threshold for this sum, such as solicitors, who must be covered by at least £2 million should a single claim be brought against them.
what is a certificate of professional liability insurance?
a certificate of professional liability insurance is a summary document that an insurance company can provide to a policyholder upon request, showing that adequate insurance has been taken out, without disclosing the confidential policy document . this might be necessary to present to a client or trade body as evidence that the organization in question fully complies with relevant professional standards.
A certificate of professional liability insurance can also be used to show current and prospective clients and give them peace of mind that should they need to make a claim against services offered in the future, a claim has been made. adequate financial provisions to satisfy such claim.
what is escape coverage?
Professional indemnity insurance may be required even after a business goes out of business or merges with another organization. For professionals moving to another area of business or simply retiring, claims against them remain a very real possibility.
Therefore, so-called “disengagement” coverage is available, which is designed to offer the same level of peace of mind to a professional person who is no longer offering services. such indemnity policies are ideally purchased when a professional goes out of business, whatever the reason. This could be due to the closure of a limited company, for example, but also the dissolution of the company is another common reason to take out a run-off policy.
In some cases, multiple years of coverage can be purchased at one time, without the need to renew, under a single policy. To learn more about execution insurance, read our guide to execution insurance.
professional civil liability insurance – glossary of terms
- breach of duty – when a professional or company fails to fulfill their duty of care towards another.
- breach of trust – revealing something without informed consent.
- civil liability: the responsibility to pay potential damages after a lawsuit.
- compensation: a forced financial remedy for losses or injuries suffered.
- defamation: defamation or slander.
- error – an error that requires legal remedy.
- negligence – professional conduct that does not meet the standards of behavior established by law.
- omission – failure to perform an act that is has agreed or inadvertently left a word, phrase or clause out of a written document.
please read our more detailed glossary of professional indemnity insurance terms.
This guidance note is intended for informational purposes only. it is not and is not intended to be legal advice. While care has been taken to ensure the accuracy of the guidance note, it should not be considered a substitute for specific insurance advice. this guidance note will not be reproduced in any form without our prior permission. © all copyrights are owned by professional indemnity insurance brokers ltd