Professional indemnity insurance is designed to protect any business providing specialist services - anything from creative design, to wording or figures, to ideas or advice - for a paying client.
If a client believes you’ve made a mistake or not done something you should have, and that mistake has cost them money, your policy covers you if they take legal action and decide to sue. Professional indemnity insurance pays for your specialist solicitor. And, if it turns out you’re culpable, professional indemnity insurance picks up the tab for compensation and/or damages.
As well as offering peace of mind, professional indemnity insurance is sometimes a requirement for being considered for a specific contract or piece of work. This is especially the case for working with larger corporations, not for profits, or the public sector. They want peace of mind, too.
If your small business is on the receiving end of an accusation or a claim, regardless of its validity, it's going to be emotionally and financially draining. You may feel confused about the legal side and worried about what's going to happen to you and your business. And that's where a professional indemnity policy comes in. It protects your time, your money, and your reputation.
Choosing a professional indemnity insurance policy
Our research showed that, of the small businesses that had bought professional indemnity insurance, 60% hadn’t read their policy wording. Small businesses must understand that insurers like to make clear that policyholders have an obligation to understand their cover.
Knowing exactly what is and isn’t covered, and what customers should and shouldn’t do to make sure they stay covered, helps avoid problems if there’s a claim. Here's a quick look at some of the terminology you may come across in your professional indemnity insurance policy to ensure you stay in the know:
Claims made vs claims occurring
Professional indemnity insurance is ‘claims made’ insurance, which means cover exists only while the policy is in place. If you were to cancel your policy after you’ve completed a project for a client, but a week later that client makes a claim of negligence, you’re not covered. ‘Claims occurring’ policies work slightly differently. In order to be covered, your insurance must be in place when the incident occurred, but it’s the insurer at the time of the incident that covers it.
If you’re a chartered accountant, an architect, or a member of RICS, you have to continue your cover, even if you stop trading. That way, if one of your former clients makes a claim, you are still covered. Run-off cover isn’t essential in all fields, but it can give you that extra peace of mind so it’s probably worthwhile considering.
Retroactive cover (aka retro)
Insurance policies can’t be backdated - if they could it would cause havoc in the insurance industry. But professional indemnity insurance is a bit different; you can put a policy in place for historic work, with the date included in the policy document. If you’re an architect, surveyor, or engineer, you’ll know that cracks can appear, materials can deteriorate, and values can decrease, and that’s when a client may be looking to make a claim. Also copyright infringement can take some time to surface, so retroactive cover can really be valuable in certain industries.
In the aggregate/any one claim
If your policy is ‘in the aggregate’, it will only pay out a set amount for all accumulated claims in a policy year, including legal costs. That is, you have a pot of money to protect you, but each claim you make takes money out of that pot - if you make enough claims that you take all of the money out of the pot, you’ve no financial compensation left. On the other hand, ‘any one claim' means your insurer will pay a maximum set amount for each claim in your policy year, with each claim's legal costs paid in addition. There's no limit to the number of claims you can make, but because it won't run out, it will be the more expensive level of cover.
Getting the right level of professional indemnity insurance cover
Whether you’re at fault or not, any allegation against you or your business has to be defended, but getting the right level of cover isn’t exactly a simple choice. The best way to decide is to think about the worst, most costly mistake your business could make, and then make sure your insurance covers that cost. It depends on the kind of work you’re doing, the kind of clients you’re working for, and what could go wrong.
You can never have too much insurance, but if your professional indemnity policy covers the most severe possible outcome, pays out any necessary compensation, and takes care of the legal costs, you’re in a pretty good position.
About the Author
Kerri-Ann Hockley is Head of Customer Service at professional insurance broker and Plain English Campaign Internet Crystal Mark holder, PolicyBee. PolicyBee recently conducted a survey among 500 UK small businesses to ascertain if they fully understood professional indemnity insurance and had a policy in place. You can view the results of their survey and find out more about professional indemnity insurance on their website.