What is Professional Liability Insurance?
What is professional liability insurance? Professional indemnity insurance, often referred to as professional indemnity insurance or IP insurance, covers legal costs and expenses incurred in your defence, as well as any damages or costs that may be awarded if you have allegedly provided advice, services or improper designs causing your client to lose money.
What is professional liability insurance?
To explain professional liability insurance (PI), you need a clear definition of what it is. Essentially, it is an insurance product aimed at companies and professional people that covers them in the event of certain mistakes made during their business. The policies available mainly cover professional negligence, errors or omissions, dereliction of duty and civil liability.
This type of insurance allows professionals to work without fear of being sued by a client or third party for issues arising from their professional activities. In short, professionals can do their work with more confidence and peace of mind.
Professional indemnity insurance was created to provide much-needed financial protection against the personal risks and losses to which professionals were heavily exposed. The origins of this insurance go back to London in the 1700s. At that time, established professions such as accountants, lawyers and architects traded with ‘unlimited liability as a guarantee of the quality of their work’.
If they made a mistake, they would pay the damages out of pocket to the customer, limited only by the value of their assets. As such, they could literally ‘take their shirt off their back’ if their mistake was significant enough. Therefore, creating insurance to protect against these losses was a much-needed solution.
Today, the increasing reliance of companies on contract services provided by many professions has greatly expanded the scope of the term ‘professional’, and a professional is considered to be any person or company that offers advice or specialized services. The risks are undiminished and mistakes can still cause a professional to lose their business and reputation without adequate professional liability insurance.
Do I need professional liability insurance?
Many professions are required to have professional indemnity insurance as part of the legal requirements of their respective industry associations. Even if you’re not required to have PI insurance, without it you could be liable for thousands of pounds in attorney’s fees and damages – not to mention lost income for the time you spend defending a claim. You probably need professional liability insurance if:
- You provide professional advice or services to your clients (including consulting or contracting)
- You create designs for your clients (such as working as an architect or design engineer)
- You want to protect yourself against claims of errors or negligence in the work you have performed for your client
- You work as a contractor, consultant, freelancer or self-employed person and your client has requested you to take out professional liability insurance to carry out an assignment
- Your industry association/regulatory body requires you to have it
Occupations that may require professional indemnity insurance include (but are not limited to):
- Management and business consultants, such as marketing consultants, training consultants and education consultants
- IT professionals, including IT contractors, consultants, programmers and developers
- Engineering and engineering contractors, including CAD designers, project engineers, and offshore oil and gas engineers
- Recruitment agencies and recruitment consultants
- Designers such as web designers, graphic designers and interior designers
- Fitness professionals, including personal trainers, dance teachers and yoga instructors
- Teachers and tutors, including private tutors
WHO IS THIS FOR?
This compensation ensures the payment of compensation to persons who have suffered financial loss as a result of the negligence of the professional or his employee in the business.
It protects against any claim for damages brought against the insured in any court in Nigeria. Actually, aims to protect the Professional from any liability and is a “Claims Made” policy as it covers claims made against the insured. These claims give rise to deductibles amounting to 10% of the claim value and may arise irrespective of the time when the event giving rise to the claim occurred. They must also first be reported to the insured.
WHAT DOES IT COVER?
While this policy is widely adopted, it has its limits set by the insured with automatic recovery and does not cover the following claims:
- Risks that are better placed under the general public responsibility
- Claims made or threatened or implied in any way before or on the Effective Date of the Policy unless stated in the proposal and not excluded by the Insurer.
- Resulting from dishonest, fraudulent, criminal or willful acts or omissions by the insured or his employee in which the event giving rise to the claim occurred before the retroactive date.
- Such complaints are reported under a previous policy.
Conditions of your cover
Professional liability coverage is usually offered on a claim basis. This means that your insurer will only reimburse you for claims made against you during the term of your policy. If a claim is made against you after your policy expires – even if the incident occurred while your policy was in effect – you will not be covered by that claim.
- For example, if an incident occurred in 2011 when you had professional liability coverage, but the customer made a claim against you in 2012 — after your policy expired — your insurer will not cover you for that claim.
- If you cancel your professional liability insurance, such as if you retire or change your profession, consider taking out a walk-through policy. This covers any new claims made against you after your professional liability insurance expires.
- New claims can be made against you up to six years after an alleged negligent act has taken place, so your run-off policy should cover you for that period.
- If you change insurers, a walk-out policy protects you from further claims for incidents that occurred while you were with your previous insurer. Alternatively, your new insurer may agree to cover you for claims related to previous incidents.
Check whether your new insurer will cover you for claims related to previous incidents or ask about taking out an extension policy.
Take out professional liability insurance
You can take out professional indemnity insurance directly from an insurer or a specialist intermediary through the British Association of Insurance Brokers (BIBA). The amount of cover you need – and the price of your premium – depends on your profession.
Some professional and regulatory bodies insist that their members be insured for a minimum amount. For example, lawyers must have professional indemnity cover between £2 million and £3 million for any claim made against them.
If you are not a member of a professional body, you can ask your clients how much coverage they expect from you.
What does professional liability insurance cost?
The cost of coverage depends on the type of profession, annual turnover, claims history, etc. For example, a financial advisor is considered high risk and will pay more than a low-risk recruitment advisor.
Fees for this insurance generally range from 0.25% to 5% of annual fees or billing revenue, depending on common risk factors and market competition. But the fees can also be higher or lower.
Minimum premiums also apply, which differ per insurer. The ‘minimum premium’ is the insurer’s starting point for ensuring risk and can differ greatly between companies. For example, the minimum premium could be £100 or £1,000 depending on the insurance company.
Insurance premiums of 12% are also due on the insurance premiums, but no VAT is due on this.
Where can I take out professional liability insurance?
Professional indemnity policies are mainly obtained from specialist insurance brokers like us. Due to the complexity of the risks involved and the wide range of products available, going to a broker with the right experience is invaluable to ensure you are buying the right coverage at the right price. A broker will understand your business needs and help you identify potential areas of risk that you may not have identified.
For a professional liability quote today, complete the quote request box on this page or call 0345 251 4000.
How is the premium calculated?
The premium calculation for a professional indemnity policy varies by profession, as some professions are much riskier than others. As with auto insurance, many factors go into the cost of the policy, not just the amount of coverage or the required reimbursement limit.
A company’s size, revenue and professional activities are a critical part of any calculation that is made, along with any claims that have already been made. The greater the exposure to a potential claim, the higher the costs involved in buying insurance.
What does professional indemnity insurance cover?
It simply covers the cost of errors in providing professional services. In today’s hectic business world, everyone runs the risk of making a mistake, no matter how professional or diligent they are. Some mistakes are minor with little or no financial cost or consequence. Still, others can be much more serious and not having adequate IP insurance can financially destroy a company, its directors or partners.
Depending on the policy taken out, it covers negligence, errors and omissions, dereliction of duty and civil liability. Professional indemnity insurance should also cover liabilities resulting from negligence, such as business interruption and significant legal costs incurred in legal proceedings.
Some policies also protect a business or financial losses caused by defamation, loss of documents, dishonest employee behaviour and accidental breach of trust.
In addition, insurance usually covers any possible infringement of intellectual property rights or copyrights, which is of great importance in the creative industry.
How important is professional liability insurance in business?
Having an insurance policy that covers a professional for their job is important as it allows them to provide services without factoring in the potential additional cost of any mistakes they may face in the future. In addition, a professional indemnity policy may also cover legal costs and expenses that may arise as a result of a lawsuit against a professional for their fault.
Without such insurance, professionals are much more exposed to business risk and may have to raise their prices to compensate. But with such insurance, they are protected from any unwanted business outcomes and can therefore operate more competitively.
Is professional liability insurance required by law?
It is not a legal requirement, but most professional institutes and associations require their members to have some form of professional indemnity insurance and regulate it through their rules and regulations. Not having insurance is often a serious disciplinary violation that can lead to a fine or closure of a company by the regulator.
In many non-regulated services, such as IT and technology, professional indemnity insurance is not a legal requirement. However, the professionals who are not required to have this type of insurance are still cautious in carrying it out. Management, business, and marketing consultants are generally not required to have professional indemnity, but they often still do to protect themselves from potential liability for legal fees or fees.
Many large companies and government departments will also insist that every service provider they work with must have IP insurance and proof.
Other professions that often cover your professional services include IT professionals, recruitment consultants, graphic and interior designers, personal trainers, instructors, educators, and private tutors. However, the list is much more diverse and extensive than just these professions.
How does professional indemnity insurance work?
Professional indemnity insurance can be an individually assessed and custom-designed product, or it can be an automated product that is easily and quickly purchased online. Ideally, the wording of the policy should be written in such a way as to meet all the specific needs of the insured.
For example, an inadvertent breach of a written contract relating to the supply of equipment or software can be important to an IT professional, but much less of a problem for a surveyor. Likewise, damage limitation coverage is probably much more interesting to professionals who work in marketing positions than private tutors say.
With the relevant company covered at the appropriate level, all you need to consider is the deductible that will be applied. As with other insurance policies, this is the initial amount of a claim that is not covered. The higher the deductible, the lower the policy premiums in general.
How much professional liability insurance do I need?
When purchasing insurance, whether it is business or personal coverage, it is important to carefully assess how much coverage is needed. This varies from company to company, and when it comes to professional indemnity insurance, assessing how much coverage is sufficient for a company’s needs can be tricky.
It often comes down to estimating the amount of financial damage that could be caused by looking at the worst-case scenario, i.e. what’s the worst that could go wrong?
There is no single solution or policy that fits all circumstances. When considering what level of professional liability insurance to purchase, consider the potential financial power of your clients and how many resources they could have if they filed a claim against you.
The other issue to consider is the likely cost of legal fees you could face without insurance should you have to defend yourself. This varies from industry to industry, but keep in mind that in all cases costs will go up to solve complex problems.
Who needs professional liability insurance?
Many professions must have up-to-date professional liability insurance to be allowed to practice through their professional body. These include lawyers, accountants, architects and financial advisors. Accredited surveyors and some health professionals are also required to purchase PI insurance from their respective professional bodies.
Outside of these areas, many professionals choose to protect themselves with professional liability insurance, even if their business organization does not require it. These include advertising professionals, business consultants, designers and public relations professionals. In short, anyone who offers professional services should wear it.
When is professional liability insurance required?
While professional indemnity insurance is not a legal requirement by law, certain professions are regulated by their respective professional bodies and individuals or organizations may be required to take out a professional indemnity policy.
For professionals who must comply with all regulations of their organization to practice legally, taking out or renewing their professional indemnity insurance becomes a de facto legal requirement. Not having insurance can in certain circumstances make it possible to take legal action against a professional.
What is not covered by professional liability insurance?
While policies vary, there are different restrictions on the type of business that professional indemnity insurance covers. These usually include issues such as employer liability, vehicle insurance issues, product liability, and insolvency or bankruptcy. However, other types of insurance can be taken out for these examples if desired.
Professional indemnity insurance also rarely covers things like personal injury, fines and penalties, or financial losses due to war or pollution and radioactive contamination.
There is a financial limit that a policy will pay in the event of a successful claim, this is called the reimbursement limit. Some professional bodies set a minimum limit on this amount, such as lawyers, which must be covered by at least £2 million in the event of a single claim made against them.
What is a certificate of professional liability insurance?
Professional liability insurance is a summary document that an insurance company can provide to an insured on request, certifying that adequate insurance has been taken out, without disclosing the confidential policy schedule. This may be necessary to provide to a customer or commercial agency as proof that the organization in question fully complies with the relevant professional rules.
A professional indemnity insurance certificate can also be used to show (prospect) customers and reassure them that should they ever need to claim the services offered in the future, sufficient financial provisions have been made to meet such a claim.
What is a run-out cover?
Professional indemnity insurance may be required even after a company ceases operations or merges with another organization. For professionals moving to another area of business or simply retiring, claims against them remain a very real possibility.
That is why there is what is known as ‘run off’ coverage, intended to provide a professional who no longer provides services with the same peace of mind. These indemnity policies are ideally purchased when a professional stops working for any reason. This can be the result of, for example, closing a BV, but the dissolution of the partnership is also another common reason for taking out an extension policy.
In some cases, several years of coverage can be purchased at once, without the need for renewal, under a single policy.
Professional Liability Insurance – Glossary
- Breach of Duty – When a professional or company breaches a duty of care to another.
- Breach of Trust – Revealing something without informed consent.
- Civil Liability – The liability for payment of possible damages after a lawsuit.
- Compensation – A binding financial compensation for loss or damage suffered.
- Slander – Slander or slander.
- Error – An error that requires legal repair.
- Negligence – Professional conduct that does not meet legal standards of conduct.
- Failure to perform – Failure to perform an agreed-upon act or inadvertently leaving a word, phrase, or clause in a written document.