Professional indemnity insurance is essential for you as a business professional or consultant as it could protect your business from legal disputes and accusations of negligence made by your clients. By having this insurance, you are protecting your business from potential claims sought from clients – making it worth the additional insurance premium.
Professional indemnity insurance covers legal costs, expenses, and compensation paid to a claimant as a result of a service, which has been proven to be inadequate or negligent in any way, resulting in a financial loss for your client.
The concept of negligence is subjective. Without proper insurance cover, you may not have access to the advice and legal defence you need in the event of an allegation and claim.
Throughout this guide, we will look at all aspects of professional indemnity insurance, including industries where it is recommended. We will also review some example claims to provide a full understanding of this product.
WHAT IS PROFESSIONAL INDEMNITY INSURANCE?
When you take out an insurance policy the hope is that you will never have to use it; however unlike Public and Employers liability whereby the policy is perhaps more beneficial to the claimant, professional indemnity is designed to protect you and your profession.
Professional insurance protects you and your business if a claim is brought against the business by a client, for reasons relating to a service that has caused them a financial loss.
It also covers your business for intellectual property infringements, claims of dishonesty or defamation, and those relating to loss or inappropriate use of documents or data.
Therefore, if you offer advice or service you could be at risk of a professional indemnity claim.
DO I NEED PROFESSIONAL INDEMNITY INSURANCE?
Professional indemnity insurance is not compulsory for all professions within the United Kingdom. However for some, including accountants it is a mandatory requirement. For those professions that would like to be members of a chartered institute, professional indemnity insurance may not be necessary, or your profession may not be required by law to hold such cover, however it is still imperative that you consider professional indemnity insurance; especially if your business provides professional services that involve advice or guidance, handling data or intellectual property. If you do not have professional indemnity insurance and a claim for negligence is made against you, the financial and reputational repercussions could be devastating to your business.
Some professions which should consider professional indemnity insurance include:
Business and Management Consultants
If you work as a consultant, then your advice is a key part of your service. Whether you’re a marketing consultant or an education consultant considering professional indemnity insurance may be a wise choice.
Self-Employed IT Professionals
IT contractors, freelance consultants, programmers and developers are all professionals that may require professional indemnity insurance. Potential claims could include dissatisfaction with software or hardware recommendations to improper use of images that result in a fine for the client.
Recruitment Professionals
Both small recruitment agency directors and recruitment consultants should consider professional indemnity insurance. Clients may be dissatisfied with your advice or recommendation of a new employee that causes the business to suffer a loss in the future.
Designers
Design is a subjective area; and whilst you may follow a client’s brief exactly, they may still be dissatisfied with the end product or service and decide to make a claim against you. Interior designers, web designers, and graphics specialists should all consider professional indemnity insurance.
Teachers and Tutors
If you teach or tutor, in any area then your business, advice and expertise are open to potential claims.
It is important to remember that your professional indemnity insurance is specific to your business type, size and requirements. This ensures that it provides the level of protection that’s needed.
LEGAL RISKS OF OPERATING WITHOUT PROFESSIONAL INDEMNITY INSURANCE
Operating without professional indemnity insurance leaves your business open to claims from third parties. Usually, they will be your clients, but other third parties could also potentially make a claim.
If you work in a professional sector, then professional indemnity insurance can protect you against civil liabilities which include breach of duties, tort, and contract. Your insurance policy can be arranged to cover as many civil liability areas as necessary.
Contractual Liabilities
If you have a contractual relationship with your clients, then this type of professional indemnity insurance is essential. Commercial contracts almost always include a clause which relates to deliverables but also that all duties will be carried out with ‘reasonable care and skill’. When a client makes a claim against you on this basis. They will attempt to prove you have failed to deliver care and skill to a reasonable level.
Tort Liabilities
If you do not have a contractual relationship with your client, but they have a legal case to make, then they may make it under tort law. Torts cover intentional, and accident acts. They usually occur on the basis of a tort of negligence and a tort of defamation. Other types of tort include property (trespass), economic (fraud, conspiracy) and dignitary (invasion of privacy). These liabilities are less likely to apply to professional indemnity insurance claims.
Breach of Duties
Professional indemnity insurance may cover you for breach of statutory duty, breach of intellectual property or breach of fiduciary duty. Cover for breach of statutory duty is particularly important in industries such as accountancy, architecture, quantity surveying or estate agency.
Breach of intellectual property rights can include copyright, trademark, patent, plagiarism and media rights. Finally, fiduciary duty is a legal relationship of confidence and trust between your business and your clients. Breach of fiduciary duty is usually when your client believes you are not acting in their best interests.
These are the core elements of most professional indemnity insurance policies, but it is possible to look at add-ons too. Add-ons may include cover for the loss of documents, fidelity, and libel/slander.
THE FINANCIAL IMPLICATIONS OF OPERATING WITHOUT PROFESSIONAL INDEMNITY INSURANCE
Operating without indemnity insurance leaves your business open to claims and, in turn, huge financial risk. The costs of a claim can quickly reach hundreds of thousands and even millions. Most insurers offer policies which provide cover from an indemnity limit of £50,000 as standard. At constructaquote.com we offer limits of indemnity online from £50,000 up to £2 million; however, as a specialist in small business policies if you speak to one of our dedicated insurance agents they are also able to quote above £2million offline.
Facing a claim without insurance is not something many businesses can survive. The combined costs of damages, expenses, and legal defence will have to come from the business’ working capital or savings.
WHAT DOES PROFESSIONAL INDEMNITY INSURANCE COVER?
Your professional insurance can protect you and your business against claims arising from:
• Breach of professional duty
• Negligent misstatement or misrepresentation
• Libel, slander or defamation
• Intellectual property rights infringement
• Opening of confidentiality
• Employee dishonesty
• Accidental transmission of a computer virus
Example Claims
Below are some examples of potential professional indemnity claims:
• self-employed web designer sued by a client who has been sent a bill by a third party, claiming their copyrighted images were in the client’s web design.
• A professional architect sued by a client because they have had to pay for changes to a building project due to flaws in the architect’s plan.
• Professional IT consultant who offers web hosting as part of their package sued because a cyber-attack meant a client’s website was offline and caused a loss of potential earnings.
• Small marketing company sued because of spelling errors and incorrect information in a flyer that has already been printed and sent out to customers.
These are just some of the potential claims a business could face. Your business is protected by professional indemnity insurance to protect against the specific risks it faces.
HOW MUCH PROFESSIONAL INDEMNITY COVER DO I NEED?
There is no exact science for calculating the level of insurance you need. There are no legal requirements and therefore no statutory minimum. Knowing the level of cover needed is complex to work out if you haven’t faced a claim in the past. The experienced specialists at constructaquote.com work hard to find competitively-priced, appropriate insurance at the level of cover requested by the client for their business.
Consider discussing your business position with other professionals, such as those in the legal sector, to ensure you are arranging the right level of cover. You can often extend your cover if you pick up bigger contracts as your business grows. You may arrange a relatively small level of cover initially but check you have the flexibility to extend it as necessary.