Professional indemnity insurance is also known as professional liability insurance, professional negligence insurance or, for some professions, medical malpractice insurance.
Most insurance is about physical things happening: trips and slips, motor accidents, fire, theft, flood and all the other nasty aspects of life. Professional indemnity insurance is about mistakes in professional life – not performing your tasks to the standard that might reasonably be expected when you offer a service.
Do I need professional indemnity insurance?
The obvious candidates for this type of cover include:
- Accountants
- Bookkeepers
- Financial consultants
- Surveyors
- Architects
- Engineers
- Healthcare professionals – doctors, dentists, surgeons, veterinary surgeons, independent nurses and midwives
- IT consultants
- Website designers
- Journalists and media consultants
- PR consultants
- Management consultants
- Interior designers
- Solicitors
- Will writers and estate planners
- Estate agents
Some of these businesses are required by their professional bodies to hold valid professional indemnity insurance in order to offer services.
Less obvious but equally important is the need for some businesses viewed as trades rather than professions such as heating and ventilation engineers, plumbers, electricians and builders. One claim involved a builder misreading a plan for an extension and building less than a metre into neighbouring land. A complaint was raised, the local planning authority decreed that the whole thing had to come down and the final cost – including the inevitable legal costs – came to over £100,000.
If any part of your business involves giving advice or doing anything that requires brain rather than brawn, then you need to consider taking out professional indemnity insurance. Because of the nature of the cover, the premiums are lower than you might expect.
The basic cover is simple. You perform a task to a lower standard than might reasonably be expected, causing monetary loss to a customer and they can claim against you. This is one reason that premiums tend to be on the low side – in public liability insurance, for example, just about anybody can make a claim. With professional indemnity insurance, only the person or business directly affected can claim. In most cases, all that can be claimed are the amount of an economic loss plus legal costs. In the case of healthcare professionals, it can be possible for emotional consequences to be considered.
Other elements of cover include:
- Defamation, libel or slander: if you were to make an incorrect statement about a rival business, for instance.
- Intellectual property: if a rival business claims that your work is too similar to theirs.
- Breach of confidentiality: leaving confidential files on a train or bus, for example.
The amount of cover that your business needs will depend on the nature of your work and the type of clients that you work with. If you work with large organisations in heavily regulated industries, then your professional indemnity requirements are likely to be higher. A minimum threshold may also be specified by a governing body you belong to. Often, this minimum is based on your annual fee income.
Otherwise, consider how much it might cost to rectify a worst-case scenario disagreement, including legal fees and losses incurred. This number can provide a guideline for how much professional indemnity insurance you need. You should also ask questions such as ‘do I have sufficient staffing capacity and cash reserves to rectify big mistakes?’ If the answer is no, then your business could benefit from a higher indemnity limit.
One of the other ways in which professional indemnity insurance differs from other types of cover is in the way in which claims can be presented. Most insurance is based on “claims occurring”. A motor accident occurs at a specific time on a specific date, as does a fire or a theft. If the insurance is in place for that date, then you have cover. With professional indemnity, an error may not become known for some time after the error was made. This is what we call “claims made”. An example might be of an accountant making an error in presenting accounts to HMRC, who then check months later, find errors and fine the client or a management consultant giving advice which sometime later results in a business losing money or even going out of business.
For this reason, once you have cover in effect, you need to keep it continuous. Even a day off cover means that you go back to the beginning and past events may not be covered. Changing insurers is acceptable but you do need to be sure that you have a “retroactive date” on your new policy. That date will be the date on which you first had cover. If you cease trading for any reason such as retirement, you need to keep an element of cover in place. Remember, it is the date on which an error becomes known that counts. Claims for professional negligence can be made for up to six years after the event. There is something called “run-off cover” which you can keep in place for those six years. The premium in the first year will probably be much the same as that you would have paid if you were still trading but then reduces over the next five years as the risk of an error causing an issue reduces. Definitely something to think about when planning closure of your business.
This is an area of insurance that could mean the difference between you continuing in business or having to close or seriously reduce your business activities so not to be taken lightly. Please talk to one of our advisers on 01442 242400 or make contact here today.
