If your business gives advice or provides a professional service, a mistake could cause a client a financial loss and lead to a claim, even if you did nothing reckless. Professional indemnity insurance protects against that. This guide explains professional indemnity insurance: what it covers, who needs it, and how it works.
What professional indemnity insurance is
Professional indemnity insurance, often shortened to PI, covers claims made against your business by clients who allege that your professional advice, services or work caused them a financial loss. If a client says you were negligent, made a mistake, or failed to deliver to the required standard, and they suffered a loss as a result, PI covers your legal defence and any compensation, up to the policy limit. It protects the work you do, not your premises.
What it covers
A PI policy typically covers claims arising from professional negligence, errors and omissions, breach of duty, and sometimes related matters such as defamation, loss of documents or breach of confidentiality, depending on the policy. The cover pays the cost of defending the claim and any damages awarded. It is designed for the kind of dispute where a client argues your work fell short and cost them money, which can arise even in carefully run businesses.
Who needs it
Professional indemnity is important for anyone who provides advice, expertise or a professional service. That includes consultants, accountants, solicitors, architects, surveyors, engineers, designers, IT professionals, financial advisers and many others. If clients pay for your knowledge or skill and could suffer a financial loss if you got it wrong, PI is likely to be relevant. The more your client relies on your judgement, the more important this cover becomes.
When it is a requirement
For some professions, PI is mandatory, because the professional body or regulator requires it. Solicitors, accountants, architects, financial advisers and others must usually hold a minimum level of professional indemnity cover to practise. Even where it is not mandated by a regulator, clients and contracts frequently require it before they will engage you. So for many professionals, PI is not optional but a condition of doing business, much like other compulsory covers.
How much cover to choose
The right level of PI depends on the size of the losses your work could cause, the requirements of your regulator or clients, and the nature of your projects. Some professional bodies set a minimum, and large clients may demand a high limit. Because a single claim can be substantial, particularly where a client has lost a lot of money, choosing an adequate limit is important. Consider the worst realistic loss your advice could lead to.
Claims-made cover and why timing matters
An important feature of PI is that it is usually written on a claims-made basis. This means the policy that responds is the one in force when the claim is made, not when you did the work. So you need cover in place both when you do the work and when any claim later arrives. Letting cover lapse can leave you exposed to claims about past work, which is why continuity matters with PI.
Run-off cover
Because PI is claims-made, a problem arises when you stop trading or retire: a claim about past work could still come in, but you no longer have a policy. Run-off cover solves this by continuing your protection for claims arising from past work after you have ceased the activity. If you wind down a professional business, arranging run-off cover for a suitable period protects you against late claims relating to work you did before.
How it fits with other cover
Professional indemnity sits alongside other business cover. It deals with claims about your professional work, while public liability deals with injury or property damage to third parties, as our guide to public liability insurance explains, and employers' liability covers your staff, as our guide to employers' liability insurance sets out. Together they cover different risks, and a professional services business often needs more than one.
Examples of professional indemnity claims
Professional indemnity claims typically involve a client arguing that your work cost them money. An accountant makes an error in a return; a consultant gives advice that leads to a loss; an architect's design contains a mistake; an IT firm's system fails to do what was promised. Even where you acted in good faith, a client can claim, and defending the claim, let alone paying compensation, can be expensive. This is the exposure that professional indemnity cover meets.
Retroactive date and past work
Because professional indemnity is claims-made, policies often have a retroactive date, and only work done after that date is covered. When you take out or renew cover, check the retroactive date covers all the past work that could still give rise to a claim. If you switch insurer, make sure the new policy maintains cover for your earlier work, or you could find past projects fall outside both the old and the new policy.
Disclosing potential claims
With claims-made cover, you usually have a duty to tell your insurer about any circumstance that might lead to a claim as soon as you become aware of it, not just actual claims. Notifying a potential problem promptly means it is captured by the current policy. Failing to disclose something you knew about can jeopardise cover for it later. So if you sense a client is unhappy in a way that could become a claim, tell your insurer.
Why honest mistakes are covered
An important reassurance is that professional indemnity is designed to cover genuine, honest mistakes, not just serious failings. Professionals are human, and even careful, competent work can contain an error that causes a client a loss. The cover exists precisely because such mistakes can happen to anyone, and the financial consequences can be out of all proportion to a small slip. It lets you do skilled work knowing an honest error will not ruin you.
The takeaway for professionals
If clients pay for your expertise and could lose money if you got something wrong, professional indemnity is cover you should take seriously, and may be required to hold. Keep it continuous while you work, watch the retroactive date when you change insurer, notify potential claims promptly, and arrange run-off cover when you stop. Done properly, it lets you offer professional services knowing an honest mistake will not put everything you have built at risk.
In short
Professional indemnity insurance covers claims that your advice, services or work caused a client a financial loss, paying your defence and any compensation. It is vital for consultants, accountants, architects, advisers and other professionals, and is often required by regulators or clients. It is usually claims-made, so the policy in force when a claim arises responds, making continuous cover and, on ceasing trading, run-off cover important. Choose a limit adequate to the losses your work could cause.
Where to get help and next steps
Read our guides to public liability insurance and employers' liability insurance to see how the covers fit together. This is general information, not financial or legal advice.