In short, professional indemnity refers to compensating a client for a loss that results from negligent advice or expertise provided by a professional or company. When a business enters a contract with a client it is expected to deliver advice and service that is up to standard. But if negligence, a mistake, or an error results in harm or financial loss to a client, the business can be held professionally liable and forced to pay damages.
What is professional indemnity insurance?
Professional indemnity insurance (also called PI insurance or PII) protects a business from legal claims by customers who allege they have been harmed or lost money as a result of professional design, advice, or service that was provided. This could be from a mistake, negligence, or other failures of professional duties.
PII covers the policyholder’s legal costs to fight the claim, as well as any potential damages the policyholder is found liable to pay.
Professional indemnity insurance doesn’t cover the basic liability protections provided by a public liability insurance policy. Public liability usually covers personal injury, property damage, and advertising injury. Instead, professional indemnity insurance is a complement to general public liability insurance.
Professional indemnity insurance for specific occupations may be referred to differently, for instance, medical malpractice for medical professionals and errors & omissions (E&O) insurance for those in real estate and accounting.
Why do I need professional indemnity insurance?
A business could be at risk of a professional indemnity claim if it sells its expertise, professional service, or knowledge. That could be in the form of advice, or by producing or creating something for a client.
No matter how diligent a business is mistakes can still happen and unexpected incidents can put a client and your business in jeopardy. And even if a policyholder has done nothing wrong, it will still need legal assistance to fight a frivolous claim.
Several scenarios can put a business at risk of professional indemnity including:
- Handling a client’s sensitive data: The policyholder could lose the documents, send them to the wrong person, or even wipe a system with a virus.
- Breach of copyright or trademark: If intellectual property, trademarks, or copyrights are infringed. For example, a policyholder could use an image it does not own the copyright to.
- Subcontracting: Where there is an act or mistake by these subcontractors that puts the client in jeopardy.
- Defamation: If a client or third party accuses the policyholder of slander or libel. For example, if an advertising agency discredits a competitor to promote its client.
- An employee is dishonest: They could leak information, steal from the company, or not have the best interests of the client at heart.
- The line of work is subjective: This is largely in creative industries where a business must use creative license to make decisions on how a product or design should look. A client could claim the brief has not been met.
- Negligence: If incorrect advice is given or a mistake is made, or a policyholder does not deliver what was promised.
Professional indemnity insurance is also required by certain professional standards and regulatory bodies for a business to be accredited.
Cover can also be demanded by a client in the terms of a contract. This is more common in high-value contracts.
There are many fields where professional indemnity insurance can be heavily recommended by experts, if not already required by an industry body:
- Financial advisors
- Insurance brokers
- Chartered surveyors
- Healthcare professionals
- Software developers
- Creative, marketing, and design agencies and professionals
Several other industries may also consider professional indemnity insurance. These include tradesmen, construction professionals, event organizers, training, education, and coaching professionals, such as fitness instructors, recruiters, marketing, advertising, or public relations agencies.