If you make a living as a qualified professional and your job revolves around giving clients your expert advice, this ultimate guide to indemnity insurance is for you.
Indemnity insurance, also known as liability insurance, is a means of protecting your business from legal disputes and claims. It covers all expenses—including legal costs—paid to compensate a client that has suffered a financial loss due to inadequate service or negligent advice.
In this comprehensive guide, we cover everything you need to know about professional indemnity insurance. That includes what it is, how it works, why your business needs it, and more. So, stick around to find out.
What Is Professional Indemnity Insurance?
Professional indemnity insurance is one of the numerous sectors of the commercial insurance market. It’s an insurance product that helps protect professionals from legal claims and disputes resulting from errors or omissions.
Also, note that there are indemnity insurance products that cover negligence, breach of civil liabilities, and breach of professional duty. Such products come at fairly steep premiums, though.
In other words, being covered by professional indemnity insurance helps eliminate the fear that you or your firm may get sued due to work-related mistakes. This, in turn, allows you to go on about your work with confidence.
In addition, the concept of professional indemnity insurance first emerged in the 1700s in London, England. Back then, architects, accountants, and solicitors operated with unlimited liability, which was viewed as a quality guarantee.
So, if any practitioner of the professions mentioned above made a mistake, they were obligated to offer compensation out of their own pockets. Undoubtedly, the extent of this liability put them, along with their assets, at significant risk. This problem made way for the idea of professional indemnity insurance to come about.
As of today, professional indemnity insurance is one of the fastest-growing sectors of the commercial insurance market, with virtually all professionals and firms relying on it. This shouldn’t come as a surprise considering how a single, solitary mistake can cost a professional their reputation or their business altogether.
What Does Professional Indemnity Insurance Cover?
Regardless of how proficient you are at your work, we’re all human and bound to make mistakes now and then. While some errors don’t garner serious consequences, others can be detrimental without proper coverage.
Essentially, professional indemnity insurance products are all designed to cover the expenses of work-related mistakes. However, some insurance products are more wide-spanning than others.
To illustrate, most indemnity products are designed to cover errors, omissions, negligence, breach of civil liability, and breach of professional duty. However, there are insurance policies that can cover financial losses that occur due to dishonest conduct of employees, company defamation, breach of confidence, and even loss of paperwork.
Not to mention, some policies can protect you against intellectual property infringement. These policies are pretty valuable if you’re someone who works in one of the many creative industries. It all boils down to the policies of the insurance you have.
In many cases, you’ll see that the more coverage an insurance policy provides, the higher the premium you’ll need to pay is. So, don’t just go all out and get all the coverage possible if you don’t want to end up paying a lot of money for coverage you don’t need.
Why Do Professionals Need Indemnity Insurance?
All qualified professionals should have a reliable indemnity insurance policy to protect their business and reputation regardless of industries and sectors.
As a qualified professional, you’re obligated by law to provide your clients with accurate and complete advice. So, if one of your clients was to suffer a financial loss due to the advice you’ve provided, they can take legal action against your business. And such a lawsuit may cost you a lot of money on legal and compensatory expenses.
In addition, a client may take legal action against you personally if they deemed you professionally negligent. This will put your personal assets at risk, including your place of residence.
It’s of extreme importance to understand that you don’t have to make a mistake or be complacent at your job for a client to believe that you’ve done them wrong. With that in mind, unfounded claims are to be expected.
However, the thing about unfounded claims is that even though they’re eventually dismissed in court, defending yourself against such claims will still cost you a significant amount of money on legal expenses.
This is where professional indemnity insurance policies come in handy. They help cover all of your legal costs, whether the claim filed against you is valid or invalid. And if the claim is found valid in court, indemnity insurance will help cover the compensatory expenses as well.
It’s also worth noting that some clients will require having indemnity insurance before working with you. That’s because they view it as a means of safeguarding the decisions they will take based on your advice.
Similarly, large corporations and government agencies will only work with qualified professionals and service providers with adequate indemnity coverage.
Is Indemnity Insurance a Legal Requirement?
No, having indemnity insurance isn’t a legal requirement. In most cases, however, it’s a condition for doing business. In fact, some industries and sectors demand that their members have indemnity insurance.
So, if you work in an industry or sector that requires having an indemnity insurance policy and you don’t have one, you may be found liable for a fine. Even worse, your business or firm may get shut down.
Professional indemnity insurance isn’t a requirement in industries that provide unregulated services, like Tech and IT. But it’d still be wise to have such protection against potential claims.
Likewise, consultants of all sectors—be it business, management, finance, or marketing—aren’t required to carry indemnity insurance. But it’s highly advisable that they do, seeing as legal claims are common in the consulting industry.
Also, remember that many large corporations and government agencies will only do business with service providers that carry adequate professional indemnity coverage.
To exemplify, some of the most notable professions that take out coverage against their services include graphic design, interior design, recruitment consultancy, private tutoring, personal training, and teaching.
How Exactly Does Indemnity Insurance Work?
Professional indemnity insurance policies come in different varieties. Some are assessed individually, according to the policyholder’s specific requirements. Alternatively, others are automated and can be purchased online. Preferably, your indemnity insurance policy should have all of your particular requirements in wording.
Also, bear in mind that what you may deem essential in your profession may not hold much value in another person’s profession. For instance, if you work in the marketing industry, damage limitation cover will be valuable to you, but it won’t be to a private tutor.
Having considered all of the core insurance terms that are relevant to your sector or industry, you’ll then need to assess the excess. We’re talking about the initial amount of an insurance claim that isn’t covered. The higher the excess, the lower premiums you’ll need to pay.
How Much Indemnity Coverage Do Professionals Need?
Several factors should help you determine how much coverage you need from your insurance policy. The first factor is the minimum coverage required in your sector, assuming you work in an industry that prioritizes having indemnity insurance coverage. If this is the case, you should refer to your sector’s governing body for guidance.
Secondly, you should consider the size of your clientele. To elaborate, the larger your customer base, the more coverage you’re going to need. After all, the possibility of something going wrong is directly proportional to the size of the clientele.
Please keep in mind that even though providing a particular service may not make you a whole lot of money, it can significantly impact the client to which you’ve provided said service.
So, what we’re saying is that you shouldn’t base the extent of your policy’s coverage solely on the scope of your work or the amount of money you’ll make. And you must take the number of people relying on your work into consideration.
Moreover, the third factor you ought to consider is your biggest clients or contracts. With larger clients or contracts, a small mistake can do a great deal of damage. So, your coverage should be adequate enough to deal with any claims a large client may file against you or your firm.
Undoubtedly, the information we’ve provided thus far isn’t enough for you to calculate the extent of coverage you need. That’s because there are plenty of factors to consider, based on your specific sector. That being said, we recommend getting in touch with a professional insurance brokerage firm to help you determine how much coverage you need.
How Much Does Professional Indemnity Insurance Cost?
The cost of professional indemnity insurance is influenced by several factors, including the type of profession you’re practising, your claims history, and your annual turnover.
But let us give you an idea of how these factors affect the cost of indemnity insurance. And we’ll take the first factor, which is the type of profession, as an example.
On the one hand, your insurance coverage will be relatively cheap if you’re a recruitment consultant. That’s to be expected since recruitment consultancy is a low-risk profession. On the other hand, if you’re a financial advisor, your insurance coverage will be relatively costly because financial advisory is a high-risk profession.
Additionally, the typical range of professional indemnity insurance is between 0.25% and 5% of the policyholder’s annual turnover or fee income. Nonetheless, the rate can be higher or lower, depending on market consumption, risk factors, and other aspects.
Note that there’s an insurance premium tax applicable on virtually all insurance premiums. That tax is typically 12%. Fortunately, insurance premiums aren’t subject to value-added tax (VAT).
Also, you should note that most insurance companies have minimum premiums, which is their starting insurance point. Minimum premiums vary from one company to another, ranging anywhere between £ 100 and £ 1,000.
How Are Indemnity Insurance Premiums Calculated?
Professional indemnity insurance premiums are calculated based on the risks associated with the policyholder’s profession. As we’ve stated in the previous section, the greater the risks associated with the job, the higher the cost is going to be.
Other notable factors that go into calculating indemnity insurance premiums include the size of your business, the professional services you provide, your annual turnover, your claims history, the amount of coverage you need, and the required indemnity limit.
What Can’t Professional Indemnity Insurance Cover?
Before we list the general limitations that you should expect from indemnity insurance products, we feel the need to highlight the fact that insurance policies vary, even within their own sectors. So, don’t expect two indemnity insurance policies to be the same.
With that out of the way, some of the limitations you should expect from indemnity insurance policies include insolvency/bankruptcy, employers’ liability, products liability, and anything that has to do with automobile insurance.
Furthermore, indemnity insurance doesn’t cover any fines, penalties, or losses that are due to pollution, war, or radioactive contamination. And, of course, you shouldn’t expect indemnity insurance to cover bodily injuries.
How Does Indemnity Differ From Public Liability?
On the one hand, public liability insurance is designed to provide businesses located in public places, including bars, cafés, restaurants, and so forth, with coverage against property damages and bodily injuries.
On the other hand, indemnity insurance is designed to provide qualified professionals with coverage against claims and disputes filed against them by clients that have suffered a financial impact due to poor service or advice.
What Is a Run-off Insurance Cover?
If you think that filing claims against a business that no longer exists or against a retired professional isn’t a possibility, think again. Just because you’re retired doesn’t mean your clients can’t file a claim against you. Similarly, just because a business is no longer around or has merged with another business doesn’t mean it’s safe from claims and disputes.
This is where run-off insurance cover comes in handy. It’s pretty much the same as standard indemnity insurance. But the main difference is that run-off cover is designed for professionals who no longer offer their services.
To elaborate, you should only think about run-off cover if you’re no longer offering your services (retired) or you’ve switched to a different career. You should also consider run-off insurance if a partnership between your business and another business has been dissolved.
And the great thing about run-off insurance is that, in most cases, you won’t have to renew it every so often. Instead, you can purchase coverage for several years in one go, under one policy.
What Is a Claims-Made Insurance Policy?
A claims-made policy, also known as a claims-notified policy, is the type of policy on which professional indemnity insurance is based. This means that an active insurance policy must be in place whenever a claim or dispute is filed against you or your firm.
With any type of insurance based on a claims-made basis, you should reach out to your insurer whenever a claim or dispute is filed against you or your business. That should be the case, regardless of the severity of that claim.
Is It Possible to Increase/Decrease My Indemnity Limits?
Yes, it’s possible to change your policy’s indemnity limits based on your needs. Refer to your insurance broker or insurance provider to learn how you should go about changing your policy limits.
And we highly recommend considering all possibilities and worst-case scenarios before changing your indemnity’s limits if you want to make sure that you and your business are adequately covered.
What Is Automatic Reinstatement in an Insurance Policy?
Automatic reinstatement is one of the provisions found in professional indemnity insurance policies. Simply put, this provision states that a policy will return to its standard claim limit after a claim or loss has been paid out.
For instance, if your insurance policy offers a £200,000 coverage and a claim/loss of £100,000 has been paid out, the policy’s original claim limit will automatically return £200,000.
Moreover, automatic reinstatement is a service that you can choose to have or not to have. If you wish to have automatic reinstatement on your insurance policy, be sure to notify your insurance provider or broker.
Not to mention, you should check that automatic reinstatement is active in your policy. Also, you should check how many times your policy is viable for automatic reinstatement. And bear in mind that without automatic reinstatement, you may be required to pay extra to return your insurance policy to its original limit.
Ultimately, if you have any remaining questions or concerns that we haven’t addressed in this post, feel free to call us on 0333 344 3705 or send us an email at email@example.com. We’ll be happy to provide answers. And to get your professional indemnity insurance quote, click here.