7 Common Professional Indemnity Mistakes SMEs Make

In this guest post from Hiscox UK, Adam Atkins shares how SMEs can avoid common professional indemnity mistakes – and make sure their PI cover works when it matters most.

By Adam Atkins

Professional indemnity (PI) insurance is an important safety net for many small businesses. It can cover professionals across all sectors, from marketing to technology.

PI insurance protects you if a client claims you made a mistake, acted carelessly, or gave wrong advice that caused them to lose money.

But simply having a policy in place isn't enough. For PI insurance to work effectively, it must reflect the business and the risks you face.

Running a small business means juggling many responsibilities, making it easy to overlook the details. Even small mistakes can lead to serious problems. These include rejected claims, financial losses, reputational harm, and lengthy legal fights.

To help SMEs get the right protection, here are seven common PI insurance mistakes – and how to avoid them.

1. Thinking you don't need PI insurance

One of the biggest mistakes a small business can make is thinking they don't need PI insurance.

If you give advice, provide a service, or manage sensitive information, you face professional risks. These risks exist whether you work full-time, part-time, or are just starting out in your career.

It's not only regulated professionals, such as solicitors or accountants, who need cover. Others at risk include:

Creative consultants
Marketing freelancers
Wellness coaches
IT contractors

They could all face claims of negligence, misrepresentation, or breach of confidentiality.

Without PI insurance, you may have to pay legal fees, compensation, and settlements out of pocket.

2. Not reviewing your cover as the business evolves

As your business grows, so do your risks and insurance needs. This includes working with larger clients, offering new services, or hiring more staff.

Many business owners forget to update their PI cover after these changes. But if your policy is out of date, you could be underinsured. You may even be uninsured for certain work. For example, a new project with a higher contract value might exceed your cover limits.

Review your policy regularly. Let your insurer know if you've launched new services, signed bigger contracts, or changed direction. This helps your policy stay relevant.

3. Assuming AI-related risks are automatically covered

AI is changing how many businesses work. However, some think their insurance automatically covers AI-related risks.

That's not always true. If you use generative AI that produces incorrect or copied content, it could lead to legal issues.

If your business uses or develops AI tools, you may need a specialist PI policy that includes AI risks. Speak to your insurer about how you can use AI in your business. That way, you can make sure you're properly covered.

4. Overlooking retroactive cover

PI insurance doesn't just protect future work – it can also cover past projects.

Retroactive cover means your policy can protect you against claims from work done before your current policy. But you must have had continuous PI cover or agreed on a retroactive date when taking out your policy. Not all policies include this automatically, and the details can vary.

Without retroactive cover, insurers may not cover claims linked to past work. This is true even if the issue has only recently come to light. When changing insurers or starting a new policy, check for retroactive cover. Also, ensure the retroactive date is right.

5. Thinking free services don't need PI cover

Many freelancers and small business owners provide free services. They may do this to help friends or to test services with new clients. But "free" doesn't mean it's "risk-free".

Even without payment, you could still face legal action.

If unpaid advice leads to a financial loss or causes issues for a client, you could be held responsible. Free work still carries professional risk.

6. Choosing a policy based on price alone

Budget is important. However, the cheapest policy isn't always the best.

Low-cost options may have higher excesses, more exclusions, or cover limits that don't match your real risks. Some may not include key features, like retroactive cover or legal support for early disputes.

While price matters, it shouldn't be your only focus. The quality of your cover is what really counts. A broker or insurer who gets your sector can help you choose the right policy for your risks.

A cheaper policy isn't a good deal if it doesn't protect you when you need it most.

7. Not reporting potential claims early enough

Many SMEs delay reporting a potential claim to their insurer. But that can be a costly error.

You might think you'll be able to resolve a complaint informally. However, if it escalates and you haven't informed your insurer, you may breach your policy.

PI insurance works on a "claims made" basis. That means it only covers claims reported while the policy is active – including potential claims.

Let your insurer know as soon as you suspect a potential problem. Early notice helps them support you from the start, which could prevent a dispute from getting worse.

Final thoughts

PI insurance is more than just a policy – it's a key part of your risk management plan. Keep your cover updated. Know what's included. Work with the right provider. This way, you'll be ready for the unexpected.

About the author

Adam Atkins is Head of Technology Underwriting at Hiscox UK. He has 10 years of experience as a specialist financial lines underwriter and, for the last 5 years, has led the development of Hiscox's market-leading specialist professional indemnity product for the technology sector.