This article originally appeared in the autumn 2017 edition of Telegraph magazine. Read it online now.
Whatever your industry – whether you’re a solicitor, builder or fitness instructor – if you’re providing advice, you’re likely to have come across the term ‘professional indemnity (PI) insurance’.
“The briefest explanation is that it’s protection for all your assets when providing professional advice and services,” explains Account Executive Martin Taylor.
And he should know.
Having worked in insurance since 1974, with 22 years spent specialising in PI, there are few scenarios he hasn’t seen.
“Most sectors need PI, which is also known as ‘errors and omissions’, but there are several main areas that should consider it,” he elaborates.
“For some professions it’s compulsory. For instance, all solicitors, chartered surveyors and insurance brokers have to have PI, as do accountants regulated by the Institute of Chartered Accountants in England and Wales. Then you’ve got design and construction businesses, where they’re doing both designing and building, as well as the IT industry. Alongside these, you have what we would term miscellaneous professions, which are everything from agricultural consultants
All solicitors, chartered surveyors and insurance brokers have to have PI, as do accountants regulated by the Institute of Chartered Accountants in England and Wales
Personal asset protection
“The core benefit of PI is personal asset cover,” Martin explains. “Without it, you could be bankrupted by the cost of legal fees and damages.
“The majority of insurer pay-outs are for legal and defence costs, rather than damages,” he continues “Regardless of how spurious the claims are, you’re still going to have to defend yourself.”
Finding your level
There are no hard-and-fast rules about how much PI cover a business should have. While some industries and contracts insist on having a particular amount of cover, it may be more suitable to exceed that figure.
“How much cover should people take? That’s the ultimate question with PI, because nothing is standard,” Martin says. “Core professions are given specific limits by regulatory bodies. Solicitors will be told to take £2-3 million dependent on their business structure; chartered surveyors have limits based on the size of their turnover; accountants have a multiple of their turnover – but that might not be sufficient.
Core professions are given specific limits by regulatory bodies
“For example, two accountants might turn overhalf-a-million pounds, but Company A only has one client, so they potentially have a much larger risk of a big claim than Company B, which has 500 clients worth £1,000 in billings each. Company B might get more frequent claims, but they’re not going to have the exposure to such large claims as Company A. Their levels of cover should be adjusted to reflect that.
“Underinsurance can mean you’re not covered for the full value of a claim. If you buy £1m-worth of cover and end up with a £2m-claim, you’ll have to pay the additional million that’s not covered, plus your proportion of the legal costs,” Martin continues. “It’s vital to speak to an experienced broker to make sure you have a sensible level of cover based on your particular risks.”
“A lot of people arrange PI online these days,” Martin states. “As with all types of insurance, it tends to be cheaper via the web because there are no advisers on hand to help with the process. Some businesses think they will never have a claim, so they get cheap cover. They view it as a formality.
“A broker can advise on whether you need it and the level of cover you should have. Online, however, the software isn’t that clever; a website won’t point out that you don’t have enough PI insurance, or even that your business may not need it.
… a website won’t point out that you don’t have enough PI insurance, or even that your business may not need it
“A good example of where buying PI online falls down is environmental consultants. They frequently provide advice on pollution and contamination, but most online PI policies totally exclude these. The insurance industry tends to exclude contamination, pollution and asbestos because they’re considered a big risk and it may be difficult to quantify. If you buy your cover online, you might not realise that and find yourself lacking vital cover. It might be as cheap as chips, but it’s not worth the paper it’s written on if you have a pollution-related claim.”
Read more: Why use an independent insurance broker?
It’s worth being aware that an online quote-and-buy process might not highlight the need for run-off cover either, which is required to operate in a number of sectors, protecting you against future legal action.
“If I retire today, I’ll cancel my car insurance and my employers’ liability insurance, for example. I won’t need them because I don’t have any employees and won’t be driving on company business. However, with PI, I’ve still got exposure for the work I did in the past. Run-off insurance covers me for these historical activities at a reducing cost.”
In the loop
PI isn’t like other insurance policies when it comes to making claims. Most claims will be processed by the insurer in place at the time an event occurred. For instance, an asbestos-related claim would be covered by the employers’ liability policy in place when the employee was exposed to asbestos. Conversely, claims made under PI are handled by your current insurer.
“Most PI policies will request that you notify the insurer in the event of a claim, but you should also inform your broker,” Martin explains. “With a dedicated claims team, we often spot there are issues with the claim. We can address these problems and advise what to do next.
“The biggest problem we see is that clients often don’t tell us about potential claims until things really go wrong. With PI, it’s important to tell your broker as soon as a circumstance arises.
…it’s important to tell your broker as soon as a circumstance arises
“Say someone refuses to pay your fee because they aren’t happy with your work – your business may try to resolve it. However, if the situation escalates, your client may want to take you to court. When you come to make a claim for defence costs, your insurer may not pay out because you’ve prejudiced the situation by trying to fix it. They may also say that it was an existing issue that wasn’t disclosed when the insurance was arranged and refuse to pay.”
Read more: The claims process explained
Case study: Professional indemnity insurance for agricultural consultants
Agricultural consultants have two main areas where they need protection. The first is when they’re assisting farmers applying for government subsidies. At present, many farmers receive subsidies from the EU and they have forms to complete with specific deadlines in order to access those funds. Agricultural consultants advise on applying for such subsidies, so there’s a potential area for providing misleading advice.
“They often advise on the application of agro-chemicals too,” Martin says. “They may give the wrong product or the wrong dilution rates, or recommend it at the wrong time of year.
“To give you an example, imagine if you had advised the application of an agro-chemical, but specified the wrong nozzle. The manufacturer’s recommendation was that it should be distributed in large droplets, which would be localised on the crop. Unfortunately, you advised that it should be applied with a fine spray. Because the droplets were so light they carried on the wind and dispersed in a neighbouring field.
“The case could be very complex because it affects another farmer. They would claim on their insurance, who would then pursue you for providing incorrect advice. Without PI, you would have to manage the cost of the proceedings and any damages yourself.”