Professional indemnity insurance will protect you against claims made by past or present clients as a result of mistakes you may have made while carrying out your work.
Although claims for negligence, data loss, and other mistakes are rare, the financial consequences for limited company owners in having to defend themselves against them can be very high.
As a result, growing numbers of people in professional industries are taking out PI cover to cover this eventuality, however unlikely it may be to happen. PI policy holders include professionals in marketing, IT, accounting, and other industries where specialist advice is provided to clients.
Many clients, and recruitment agencies now insist that you have adequate business insurance cover in place, before you are offered work, so in some cases the requirement to secure insurance cover will be mandatory.
What does PI Insurance cover?
This type of cover will protect you in the event of claims for negligence, dishonesty, unintentional breaches of your client’s intellectual property, and loss or data and documents. The most significant cost you would otherwise be expected to bear would be for professional representation to fight any claim, as well as any damages you might be liable to pay your client. The extent of the financial benefits you will receive will obviously depend on the type of PI policy you take out.
Unless specified in your contract, many industry experts say that you should take out as much PI cover as you can reasonably afford.
The price of professional indemnity cover is not prohibitively expensive. When bundled with other types of business insurance (public and employers’ liability being the most likely constituents), you should be able to secure sufficient annual cover for around the £400-600 mark, depending on the industry you are in and other factors.
When taking out a quote, you may also consider taking out retroactive PI cover (see below) to protect you and your business from claims made by previous clients. Clearly, there must be no pending claims for previous work done in order to bolt on retroactive cover. A decent supplier will also be able to tailor a policy to your specific needs, especially if you are working in a niche field.
If you are thinking of changing careers, or even retiring from contracting, you should also consider taking out run off PI cover (see below) which will protect you from claims made in the past, after your ongoing policy expires.
What is Run Off cover?
Run off cover is designed to cover individuals for claims made against them after they have left their profession or retired.
If you have decided to change careers, or have retired, and have cancelled your current professional indemnity policy, then there is the possibility that a client could make a claim against you for work done in the past.
Unless you have taken out a run off policy, then you will not be covered by the expired policy. This is because PI insurance operates on a ‘claims made’, rather than ‘claims occurring’ basis, i.e. the date of the claim rather than the date when the incident which gave rise to a claim took place.
As an example, you held a PI policy from 2000 to 2010 when you ceased to be a contractor. Some time after you moved on, a client makes a claim against you in March 2012 for work you carried out in 2009. Your old policy will not cover you for the claim, as the claims made date in March 2012, and is not backdated 2009.
Insurance industry experts recommend that run off PI insurance is taken out for at least 6 years – the statutory time limit for breach of contract claims.
As the likelihood of a claim decreases over time, you can also expect your annual premiums to decrease accordingly each year from the start date of the run off policy.
How does retroactive cover work?
As claims for mistakes or negligence made by professional workers may be made by clients several years after a project has completed, many contractors and other workers may wish to take out retroactive professional indemnity insurance to cover their companies from a past date such as the date of incorporation.
Clearly, in order for this type of cover to be offered by any insurer, the insured would be required to make a declaration that they are not currently aware of any claims which may be made against them for work carried out in the past.
If you are considering taking out retroactive cover (if it is not included as standard on your policy), you should check the terms and conditions of cover. In many cases, the retroactive element of the policy is only valid for as long as you are covered by that particular insurer.
So if you decide to change insurers somewhere down the line, you will have to take out fresh retroactive insurance to cover all past claims to the start date used on your previous policy.
If you have taken out PI cover for a new company, then your ‘retroactive’ and ‘inception’ dates on your policy will typically be the same.
How to get a PI Insurance quote
For an instant online PI quote, try Hiscox. If you apply now, you can even pay monthly for your policy.
Or for more information on professional indemnity insurance click here.