What does Professional Indemnity Cover?

We are often asked about professional indemnity insurance and what it covers, usually because it’s appeared in a contract as a requirement, or a regulator has specified that the business must hold the cover.

Professional indemnity insurance, also known as PI insurance, is an insurance policy specifically tailored to businesses that provide advice or services to clients. There are various sector specific specialist wordings (so not all policies are equal!), but in general terms the policies will cover claims made against you for losses or damages caused by negligent advice, errors, omissions, or breach of duty in your professional services.

The policy will indemnify you for your legal costs (which can often be higher than the alleged loss!), as well as the cost of putting things right.

What is an example of a professional indemnity claim?

Accountant
An accountant makes an error in preparing a client’s tax return, resulting in the client being penalised by the tax authorities for underpayment. The client files a claim against the accountant for professional negligence. The PI policy can cover the costs of compensation claims made by the client, including legal fees and any damages awarded (but not the tax owed).

Engineer
An engineer designs a structural component that fails to meet safety standards. As a result, the structure collapses, causing extensive property damage. The client files a claim against the engineer for errors in their professional services. This would be a complex PI claim, with the policy responding to the legal defence costs, any expert witnesses that are required as part of the defence, as well as the costs associated with clearing the site and the client having to re-do the work.

IT Professional
An IT consultant installs a software system for a business but fails to properly test it, leading to a major system failure. This results in the business experiencing downtime and financial loss. The business files a claim against the IT professional for negligent services. Again, the PI policy will meet the legal costs, any experts required, including loss adjusters to evaluate the damages claim, as well as the costs incurred by the client in rectifying the mistake.

What are the benefits of professional indemnity insurance?

When it comes to professional indemnity insurance, one of the biggest benefits in this cover is the certainty in knowing that the potential cost of claims is going to met which is of particular significance when considering the legal expenses associated with defending your position. Legal battles can be protracted and incredibly costly, with solicitors’ fees, court fees, other related costs. Without PI Insurance, these expenses could severely impact your business’s financial stability, potentially leading to insolvency.

PI is often a contractual and/or regulatory requirement. Many industries have stringent regulations that stipulate that you must hold professional indemnity cover. This insurance not only helps you comply with these requirements but also enhances your credibility with clients, giving them comfort that if the worst happens, they have an insurance policy to fall back on.

Do all solicitors need professional indemnity insurance?

The Solicitors Regulation Authority (SRA) mandates that all practicing solicitors, regardless of whether they are performing reserved legal activities (which include tasks such as litigation, conveyancing, probate, and advocacy) or non-reserved legal activities, must maintain adequate PI.

However, solicitors working in-house for their employer are generally exempt from this requirement, unless their work involves providing commercial legal advice or services to clients other than their employer.

Can I work without professional indemnity insurance?  What happens if I don’t have professional indemnity insurance in place?

Some firms can, some firms can’t, and it’s best to take the advice of COHIBL if you’re not sure. Operating without professional indemnity insurance might be tempting to cut costs, but the potential financial burden of legal claims can be devastating. If your client files a claim for professional negligence, you could be liable for substantial damages, including court fees, solicitor costs, and compensation payouts. Without insurance, these expenses would come out of your pocket, potentially leading to severe financial distress or even bankruptcy.

There is also the fact that PI insurance is often a regulatory requirement. Ignoring these requirements can result in penalties, fines, or even the loss of your membership or professional licence. Additionally, many client contracts stipulate the need for PI as a condition of doing business. Failing to comply with these contractual obligations can lead to breaches of contract, loss of clients, and damage to your professional reputation.