One of the most common questions we are asked by clients is “how much professional indemnity insurance do I need?”
The straightforward answer is, as much as you can afford, but to help you come to an informed choice, let’s examine some of the critical factors that could impact your decision.
What is PI Insurance?
Firstly, let us quickly recap the cover provided and the types of losses you need to consider.
Professional Indemnity Insurance provides cover for legal costs and expenses if you (or one of your employees) is alleged, in the course of your professional duty, to have provided either inadequate advice or services to a client.
The policy will pay the costs of defending a claim, plus any compensation due to your client and/or rectification costs to remedy the error.
- A Mortgage Consultant advises his client to take a 5 year fixed loan. After a year, the client is looking to move property and wants to move to a different provider. It is alleged that the consultant did not point out the early redemption penalty, and the client is looking for compensation.
- A web designer fails to notify his client of their domain renewal, and it inadvertently lapses, causing the client website to go down. The client is looking to reclaim lost revenue and compensation.
How is cover provided?
A Professional Indemnity policy is based on a level of indemnity (sum insured), typically from as little as £50,000 up to £10 million or more.
The level of indemnity is the maximum amount your insurer will pay, and with such a vast spectrum of cover options, you must select the level that is right for your own business.
However, to make things even more complicated, not all policies offer the same basis of cover. Before you can decide on the correct indemnity level, you need to understand if a policy provides:
- Aggregate or Any-one-claim limits. A more basic policy will provide cover on an aggregate basis. An aggregate limit means that the level of indemnity is the maximum the insurer will pay during the policy term, regardless of the number of claims received. Wider cover is provided by an any-one-claim limit, whereby the insurer provides the indemnity level for each-and-every claim reported. In simple terms, if you have an aggregate limit of £100,000 and suffer a loss of £50,000 in the first month of the policy, the policy will only respond to a maximum of a further £50,000 for the remainder of the policy term.
- Costs-in-addition or costs inclusive. More small print I’m afraid, but a crucial point when considering your indemnity level. If the policy is ‘costs inclusive’, all legal costs will eat into the indemnity. For example, you suffer a £25,000 claim and legal costs are £15,000, the total loss paid out of a costs inclusive policy will be £40,000. As such, you can see how this could quickly increase, or even exceed, a policy limit on a large claim. Conversely, a costs-in-addition policy will cover all legal charges in addition to the indemnity level.
Regulatory or Contractual Requirement
Another key factor which influences the choice of PI Insurance cover is a pre-determined contractual requirement or agreement.
If you are a member of a trade body such as RICS, you may find that a stipulation of membership requires you to purchase a specific level of cover.
In a similar vein, when tendering for specific contracts, businesses are often required to maintain a pre-determined indemnity level.
TOP TIP: As Professional Indemnity is written on a “claims made” basis (a policy needs to be in force when the work is carried out AND when a claim is reported).
You must understand how long the contract specifies you need to maintain a particular indemnity level and that you factor any additional premium cost into your tender response. Runoff cover requirement can often be 7 or even 12 years under some contracts.
As many PI claims revolve around a contractual failing, an important area to review is your maximum contract value as this could provide an indication of the most significant claim that may result.
This is not an exact science as additional costs, or losses could also be incurred, but it is a fair barometer in the decision-making process.
In some professionals, a business may have a large number of smaller clients. You should consider if:
- Clients could all form part of a single loss?
- Or, could similar losses arise from a large number of clients?
If your business is more at risk to multiple claimants from similar losses we would recommend an any-one-claim indemnity limit if at all possible or you could quickly exceed an aggregate based limit.
Obtain a Range of Quotations
In today’s litigious society, it is always better to err on the side of caution and purchase as much cover as you can afford.
We would recommend you obtain several different indemnity options to Compare Professional Indemnity Quotes and make an informed decision as to what is right for your individual business.
Book a FREE Business Insurance Review
Insync Insurance can provide a FREE review of your professional insurance requirements, why not book a slot with one of our business insurance gurus via our website at a time that suits YOUR diary.
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