What is professional indemnity insurance? Image credit: AdobeStock
Professional indemnity is a type of business insurance that protects professionals against giving poor or negligent advice. If you’d like to learn more or get quotes, follow up by reading the NimbleFins professional indemnity insurance guide.
Professional indemnity insurance is a type of business insurance used by professionals who are paid for their advice or service. It protects these professionals against being sued by their clients for giving negligent advice or service that results in a financial loss to the client.
Professional indemnity insurance has two aspects of cover: payment of legal costs and payment of any compensatory damage a business is required to pay their client. Beyond the clear financial benefits, a professional indemnity insurance policy will provide access to qualified legal professionals to help deal with a covered legal situation. Most business owners wouldn’t know how to find a suitable legal team to help with a lawsuit of this nature, so this access is another strong feature of a good professional indemnity policy.
The amount of professional indemnity insurance a business needs is quite variable. In some cases, there may be specific minimum limit requirements. This typically occurs when a professional is a member of a trade body.
For example, certified accountants must abide by minimum professional indemnity limits, and must provide proof of their coverage each year. Minimum limits for accountants are determined by their total annual fee income as well as the activities they perform. For instance, firms participating in probate or insurance distribution may have specific requirements tied to these activities.
And the Financial Conduct Authority (FCA) requires insurance intermediaries to hold a minimum amount of coverage as well, which is also tied to annual income.
In general, the amount of professional indemnity insurance required will be tied to factors like the business’s annual income and the size of a business’s largest contract. A specialised broker or agent can help a business owner determine how much professional indemnity insurance their business will need.
Keep in mind that there are two types of professional indemnity limits: aggregate and single claim. As the names suggest, the “single claim” limit is the most a policy will pay out for a single occurrence. And the aggregate amount is the most a policy will pay out across multiple claims during any one policy year.
Ultimately, a specialist provider can help guide you to decide how much you need given your unique situation.
Professional indemnity insurance premiums vary widely in cost, ranging from as little as £47 a year up to tens of thousands of pounds a year. Professional indemnity premiums depend on many factors, which is why prices are so different from one business to another.
Perhaps the largest factor in determining how expensive a professional indemnity policy will be is a business’s line of work. For example, the cost of a professional mistake can be very high indeed for a builder or architect, considering how expensive it can be to remedy a construction mistake. As a result, construction or architecture businesses are prone to paying particularly high professional indemnity rates.
And insurance rates can rise rapidly for related industries following a catastrophe like Grenfell Tower because many buildings are faced with combustible cladding panels. Due to the significant risk of lawsuits, professional indemnity insurance underwriters are facing significant losses and, as a result, premiums rise for all related industries. where the risk of combustible insulation
A retroactive date on professional indemnity insurance means the policy will cover any incidents all the way back to the retroactive date. A company that’s had continuous professional indemnity insurance over the years will have a retroactive date on their policy dating back to the start date they were first covered.
For example, if a design company was formed in June 2018 and held continuous cover, then when they renew their policy in June 2021 this policy will have a retroactive date of June 2018. This means that any advice or services delivered since June 2018 will be covered, so long as the current policy is still active.
Having a retroactive date is important for professional indemnity policies because an error might not be made apparent until years after the advice or service was give, such as with the cladding disaster. The retroactive date will also allow a business to switch insurers and remain covered over time, as there will not be a gap in cover. In that case, the new insurer should maintain the previous retroactive date, which means the new insurer could end up paying for a claim that occurred when a business was covered by a different insurer.
Anyone switching professional indemnity insurers should be well aware of this detail.
Professional indemnity insurance is a key piece of coverage for any self-employed individual or company engaged in providing professional advice or services. This encompasses fields such as design, construction, architecture, consulting, advertising agencies, business analysts, event promoters, financial professionals and more.