The benefits of professional indemnity insurance with examples

Professional indemnity (PI) insurance (also known as Errors & Omissions insurance) protects you and your business against claims made by clients for errors in advice, services, or designs that you provide.

It’s a vital part of business insurance cover for companies of all sizes in a wide range of industries, given the potentially high costs of defending legal action.

But what are the key benefits of PI insurance, what type of companies need professional indemnity, and what type of scenarios are covered by PI?

• Five benefits of professional indemnity insurance
• How do I know if I need professional indemnity insurance?
• Professional indemnity claim examples

Five benefits of professional indemnity insurance

Whether you are a freelancer providing design services or a large firm of accountants with multinational clients, professional indemnity insurance can benefit and protect your business.

Here are five of the key benefits of PI insurance.

1.Financial security

Protecting your business’s finances is the most important benefit of professional indemnity insurance.

The cost of defending legal action, and paying any compensation due, following an error in your work can be ruinous, and could force the closure of your business.

PI insurance will cover your legal fees, court costs, and compensation awards, including any fines your customer has incurred because of your mistake.

It provides a financial safety net to deal with the repercussions of claims for errors and omissions.

2.Increase your chance of winning tenders

In some industries potential clients may make it a requirement of applying for tender that you have professional indemnity insurance up to a certain limit.

So without PI insurance you may not stand much chance of winning lucrative contracts.

Having PI insurance cover puts you in a strong position to apply for tenders and get ahead of your competitors.

3.Business continuity

Dealing with legal issues arising from a claim against you can be hugely disruptive and time-consuming.

One of the benefits of professional indemnity insurance is how it can reduce disruption through provision of essential professional support, including claims management, and, crucially, allowing you to continue running your business.

4.Credibility and reputation

Having professional indemnity insurance gives your business a stronger brand image and adds credibility.

It assures your clients and investors that should there be an error in your work, PI insurance is in place to deal with the legal issues arising therefrom and limiting financial exposure for all.

More clients are likely to want to work with you if they know your services are backed up by PI insurance.

And if you are found to have made an error that costs a client money, PI insurance will act quickly to deal with the claim and minimise impact on your reputation.

5.Peace of mind

Professionals can work better when freed from the potential consequences of making a costly error.

And if a claim does occur, professional indemnity insurance provides the peace of mind for all parties concerned.

PI insurance provides practical support and financial help to reduce the stress on all concerned, and help you get through a difficult period with the minimum of anxiety.

How do I know if I need professional indemnity insurance?

If your business provides professional advice, services, or designs to clients, then you should have professional indemnity insurance. Some industry bodies will make it a requirement of membership that you have such insurance and will often stipulate a minimum level of cover.

So, what is a professional? In short, it’s anyone who is selling their expertise and specialist knowledge based on their qualifications or experience as opposed to selling a product. Sometimes there will be a mixture of both.

Clients rely on them to provide sound advice and services because of their expertise in their field, from accountants to IT specialists, and personal trainers to solicitors.

Other professionals who need professional indemnity insurance include, but is not limited to:

• Architects
• Financial service advisers, mortgage brokers, pension advisers and investment managers
• Translators
• Chartered surveyors
• Recruitment consultants
• Insurance agents and brokers
• Marketing and advertising professionals, including web designers
• Business consultants
• Stockbrokers
• Public relations professionals
• Publishers
• Valuers
• Estate agents
• Healthcare providers

There may be other reasons why you need to have PI insurance, and we’ve covered some here.

Industry requirement: Some industry regulators or professional bodies require practitioners to have professional indemnity cover, such as solicitors, chartered surveyors, insurance brokers, financial advisers, architects, accountants, and healthcare professionals.

It’s particularly important to check the rules, regulations, and industry association membership requirements that apply to your business before beginning to trade as PI may feature among them.

Contractual obligation: Some clients – particularly those entering into high-value contracts with you – may make PI a condition of the business deal.

You’re a partner or sole trader with unlimited liability: In this case, professional indemnity is essential to protect your personal investments – as well as your business.

If a client was to bring legal action against your business for a service it deemed inadequate, and you didn’t have PI in place, then you would find yourself personally responsible for legal fees and any compensation if your business couldn’t pay them. This could mean having to sell your own assets, such as property or vehicles, to clear the consequent debt.

You’re retiring from an advice-giving business: When you’ve ceased trading, legal action could potentially still be brought against your business for advice given to clients in the past. ‘Run-off cover’ is available to limited companies or partnerships, including LLPs or sole traders, and provides protection in the event of future claims.

It covers the former business owner or partners as well as directors and staff. But even if you’ve passed the reins of the company over to someone else, who will be maintaining its PI cover, you may still need to take out your own run-off policy. The new business owner could require it as a condition of the sale, or perhaps you would prefer to manage your own liabilities.

Professional indemnity claim example

Professional indemnity insurance provides cover for a range of scenarios that could cause financial loss or damage to your client, such as loss of documents, breach of confidentiality, making defamatory statements, breaching copyright, or incorrect advice.

But if everything so far has all seemed a little theoretical, let’s look at some examples of professional indemnity claims to see how the cover works in action.

• An architect recommends a building material that proves inappropriate for the project, resulting in the building work needing to be rectified at the cost of the architect’s PI insurance.
• An advertising agency prints the wrong telephone number and email address on a client’s marketing material, resulting in a reprint.
• An accountant fails to file a tax return by HMRC’s deadline, resulting in their client receiving a penalty fine.
• A haulage company sends building materials to the wrong location, causing delays in construction that attract contractual penalties. This is a good example of a business which provides both product and professional services.

To find out more about professional indemnity insurance, and whether it would be beneficial to your business, contact our team on 01603 218000.