The Bionic guide to professional indemnity insurance

Most businesses - large or small - will need some type of insurance. This could be building insurance or contents cover, to protect your property or equipment from damage, or a more complicated type of cover to protect you against legal action.

Indeed, if you run a business that operates in a particular trade or sector where it is possible you could be sued by clients or customers, then professional indemnity insurance is probably something you should look into. This guide will explain what it is and how you can get it.

What is professional indemnity insurance?

Professional indemnity insurance - or PI insurance - is a type of business insurance that protects you if you need to pay compensation to your clients. It is typically taken out by businesses that give advice or provide professional services.

Businesses like these, such as law firms, may be sued by clients who lose money because of what they think was bad advice or poor service. In these instances, PI insurance will cover your costs and could save you from financial difficulties.

What does professional indemnity insurance cover?

Professional indemnity insurance in the UK covers a huge range of events that could lead to your business being sued or facing compensation claims. Most of these are negotiable, and you should only agree to a policy that covers the needs of your particular business.

Your PI insurance may cover a number of occurrences whereby your client suffers financial or even reputational loss. These include:

• Breach of contract, confidentiality or copyright, even if these breaches are unintentional
• Causing financial loss through negligence, whether due to poor advice, incorrect information being passed on, or because your client’s budget has overrun 
• If a customer or client is injured due to your or your employees’ negligence 
• Loss or damage of any stock, equipment or property
• Loss of documents containing confidential information or data
• Libel or slander. This can mean using or producing statements that could be seen to do damage to a client’s reputation

When is professional indemnity insurance required?

PI insurance is not a necessary expense for every business. So it is important to find out if your business needs indemnity insurance or not.

Some businesses will need professional indemnity insurance to be accredited as a member of their professional bodies. These professions include lawyers; accountants; financial advisers; architects; engineers; and chartered surveyors, among others.

If you work in any of these professions, it is highly recommended that you take out a professional indemnity insurance policy. In general, PI insurance is there for people who offer services or advice to clients, as professional indemnity will cover you against compensation claims made by unhappy customers.

New PII regulations for registered accountants

As of September 1, 2024 new regulations will come into play for chartered accountants who are members of regulatory bodies or associations like the ICAEW. Practising members generally must have a minimum indemnity limit of £2m for every single claim. Members with a gross fee income below £800,000 must have PI insurance that provides a minimum limit of indemnity equal to 2.5 times their gross fee income, with a minimum of £250,000. 

Find out more about insurance for accountants.

Is professional indemnity insurance a legal requirement?

No, professional indemnity insurance is not a legal requirement in the UK. However, in some professions the regulator or trade body might require you to have PI insurance before you can register with them. In effect, this means that this type of insurance is a prerequisite for you to operate as a business.

This is true in the UK for solicitors, accountants and architects.

Do businesses need indemnity insurance?

Although not required by law, indemnity insurance can be a good idea for your business. Professional indemnity insurance protects you against claims for loss or damage made by clients or third parties.

How much professional indemnity cover does your business need?

Most insurers will offer professional indemnity cover up to a value of around £5m, though the higher the value of your cover, the more the insurance is likely to cost.

To work out how much cover you need, look at the cost of the project you could be sued over against how much any professional negligence could cost your clients. Generally, if you are carrying out high-value work for large clients, your level of PI cover should reflect this.

Does public liability insurance cover professional indemnity insurance?

Public liability insurance covers claims for compensation from members of the public. This normally applies to claims from people who are injured as a result of your work.

Most public liability insurance policies do not include cover for professional indemnity claims, which relate to claims from clients or customers. However, some insurers might be able to offer you a single policy that covers both public liability and professional indemnity. 

How much does professional indemnity insurance cost?

How much you are likely to pay for professional indemnity insurance will vary greatly and depends on the size and type of your business. As a rule, the more risk you are likely to encounter as a business, the more you will pay for insurance.

For a small business, you could get sufficient professional indemnity insurance for just a few pounds a month, which could cover you against claims that stretch into the tens of thousands. 

Always get a professional indemnity insurance quote before signing up for a policy. And shop around to see if you can beat it.

How long does professional indemnity insurance last?

Most professional indemnity quotes will be for a fixed 12-month period, although some insurers will offer longer policies on a rolling basis.

However, you would not be able to get a PI insurance policy for anything less than 12 months, because these policies are offered on a ‘claims made’ basis. In other words, any PI policy must be active both when an incident related to a claim happens, and when that claim is made.

What does a retroactive date on professional indemnity insurance mean?

A retroactive date on a professional indemnity insurance policy may apply when you are switching insurers and want to claim for something that happened under an old policy.

In effect, a retroactive date allows you to backdate the start of your new policy. However, you will have to prove to your new insurer that you had suitable professional indemnity cover when the event you are claiming for occurred.

Is professional indemnity insurance tax deductible?

Business insurance of any kind is considered an allowable expense by HMRC, and therefore professional indemnity insurance is usually tax-deductible. Remember to keep all your records when submitting your tax return.

Does a limited company need professional indemnity insurance?

Most types of insurance are not legally required for limited companies or businesses. As we mentioned, the only business insurance that is required by law is employers' liability insurance, which you must have if you employ any staff.

How to get the right professional indemnity insurance with Bionic

Business insurance can be a confusing market, and finding professional indemnity insurance can be a daunting prospect for a small business owner.

To get the right type of cover at the best available price, talk to the experts at Bionic. We will use our smart technology to do the heavy lifting by comparing thousands of quotes from hundreds of insurers. All you need to do today is give us a call and discuss your business needs with us.