Professional indemnity insurance – what you need to know
Physical risks such as flooding and fire are one thing, and apply to domestic homes as much as businesses. But companies have other issues to consider such as the potential risk of legal action, depending on the nature of their business. Professional indemnity insurance is a form of cover which may pay out for legal costs and as such may be a potential lifesaver in certain circumstances.
Typically this kind of cover pays out for solicitors’ fees and compensation costs if you are taken to court as a business or sole trader. This may happen because the client thinks you have done a poor job, and the cover may apply to pretty much anybody who offers professional advice.
In the past it was mainly associated with the likes of architects, solicitors, and doctors. In some circumstances a trader may need professional indemnity insurance, or PII as it is known, in order to gain membership of professional bodies or to comply with legal requirements.
These days with the emergence of a more legally aware society, professional indemnity cover may be useful for a wider number of firms such as IT contractors, builders, designers, management consultants, and a whole range of other experts.
Provided somebody stays within the policy limit, payouts may be made towards legal costs and compensation right the way through the court system, from initial hearings all the way up to the High Court if the case gets that far. Furthermore, payouts are not dependent on whether or not the claim against you is valid or not. Even if it is found that the claimant’s allegation is correct, you would still get a payout.
Professional indemnity insurance comes in various different levels, and the top payout level on a policy is important. Choose something too low, and you may end up under-insured, forced to pick up the difference if your case overruns in terms of legal and compensation costs.
Choosing something to high may mean that you end up over-insured, paying for a level of protection that you don’t really need.
You may choose to carefully review your turnover, client list, and other factors before deciding on what level of cover to choose as it is important not just in terms of the premium costs.
Professional indemnity insurance limits may be quite flexible depending on the provider, allowing you to specify a level which stays within your budget but which provides adequate protection in the event you do face that unwanted court case.
Taking out a basic professional indemnity insurance plan
Although a consultant or contractor typically does their best to complete jobs in good faith and to the best of their ability, it is almost inevitable that disputes of some form will arise from time to time. Although in many cases arguments can be sorted out amicably, sometimes clients can be minded to take legal action. This is why many professionals decide to have professional indemnity insurance in place as a safety net.
Imagine a management consultant making a series of recommendations which later turn out to actually harm a business rather than help it, or a computer contractor installing a network which crashes and loses a company money. These are brief examples of when the professional’s client may decide to sue.
This will mean defending a case in the courts, and civil actions are notoriously expensive when it comes to hiring a legal defence. Furthermore, if the case is lost there is always also the chance that compensation could be awarded in favour of the complainant.
Professional indemnity insurance, often referred to in business circles as PII, will typically pick up a policyholder’s legal bills in the event they are sued. This means they are effectively protected against massive legal expense in the event of a court case.
This kind of insurance normally protects against claims that the policyholder has committed a mistake, error, or act of negligence in their general day to day business. It can protect an individual contractor or a firm with a number of employees as a whole.
Normally a basic policy will also protect against claims someone has breached confidentiality or copyright accidentally, or even that they have defamed somebody through libel.
While hardly guaranteed, these circumstances are all real risks which can have massive financial implications for a business which does not have professional cover.
Professional indemnity insurance normally features premiums which are based on the size of the maximum payout on a policy, ie the highest amount the insurance company is prepared to pay towards legal costs and compensation in the event of a claim. This can be hundreds of thousands of pounds for smaller businesses or millions for larger firms.
Features of professional indemnity insurance
Getting the right kind of cover and protection is essential for any business, from insurance if there is a break-in and theft of equipment, to protection if the company faces legal action. Professional indemnity insurance is a type of policy taken out by many businesses and individuals who offer their advice on a professional basis. Premiums are often linked to the maximum payout limit, and all types of this insurance cover someone’s legal costs in the event they are accused of making a professional mistake.
Professional indemnity insurance is sometimes simply referred to as PI or PII, and is traditionally popular with those who offer their services on a consultancy or contractual basis. In the past this has often mainly meant the likes of private doctors, architects and graphic designers.
However, the modern business is now more aware of legal issues than ever, and may be more minded to seek legal action if they feel they have lost money because of a mistake in a consultants work or advice. Therefore the dilemma can apply to the likes of management consultants, IT contractors and health and safety advisers - in fact just about anybody who provides their advice on a professional basis.
Indemnity cover is an insurance policy which pays for your legal defence if you face a formal legal challenge that you made a mistake, error, omission or committed an act of negligence in the course of your business.
Defending a case and hiring a solicitor can be costly so many policies have high maximum payout limits, sometimes for millions of pounds, although such high levels won’t be needed by every type of firm. It is usual to find indemnity insurance which protects against other things including claims of defamation, unintentional copyright infringement, and accidental breach of confidentiality.
Professional indemnity insurance typically involves a premium related to the type of business which is being insured, and the types of client and contract it deals with. However, the policy applicant typically also has to decide the maximum payout limit – which would cover legal bills and any compensation order in the event of a claim – so getting this level right is important. But remember provided someone typically stays within the limit they are entitled to the payout however far through the court system their case got – even to the high court if needed.