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Professional Indemnity Insurance – Small Business

Small businesses need professional indemnity insurance if they trade their expertise. That could be in the form of a skill such as designing electrical plans or selling advice and knowledge, such as a consultant or accountant.

Professional indemnity insurance primarily covers the legal fees and compensation demanded by a client who claims a small business’s negligence caused them to lose money. Suppose a business’s field of work carries a risk of causing a client financial loss. In that case, they should consider professional indemnity insurance as part of a comprehensive insurance package, as explained by Companies House.

The top industry areas that need professional indemnity insurance are architects, accountants, engineers, financial advisors, insurance brokers, IT specialists, healthcare professionals, solicitors, planning and surveyors, risk management, consultants, design and construction, interior designers, coaching, training and education.

Other professions should also consider professional indemnity insurance: writers, PR agencies, advertising agencies, marketing agencies, business analysts, freelancers, event manager, mortgage brokers, recruiters, security consultants, software developers, landscapers, tradesmen. However, this is not an exhaustive list, and other professions may need coverage as well.

It is especially important for self-employed people to take out professional indemnity insurance because they do not have the financial protection offered to a limited company. A sole trader will be liable for all costs that come their way, including hefty legal bills and claims for damages.

No matter how diligent a small business can be, it can still be the victim of unfair legal claims. Even if it is innocent, it will still need legal representation to fight the allegation.

There are also unexpected issues that could jeopardise a client, such as a staff member being signed off sick, meaning a client’s deadline is missed.

Legal costs can easily run into thousands of pounds, and insurance providers often cover damages well into the millions of pounds – because that is how much a sole trader could be pursued for. Few sole traders would be able to survive if they had to find that kind of capital themselves. Experts are even now suggesting claim limits should be set at £1 million as a minimum.

What does professional indemnity cover?

Professional indemnity covers the quality of the work or service carried out for a client. Indemnity offers financial protection against losses to a business if a customer seeks damages.

Professional indemnity insurance covers the legal cost to defend against a claim, plus any damages paid out.

Incidents that could see a customer claim a business include:

  • Losing or destroying a client’s sensitive data or its documents
  • Giving bad advice
  • Making a mistake
  • Not meeting a brief
  • Defamation against a client
  • Breaching copyright or trademarks
  • Dishonesty by employees
  • Acts or omissions of subcontractors

Even the most conscientious and diligent business can make a mistake. For example, a business could unintentionally lose a client’s documents if it received a virus on its computer system. Or a business misses a client’s deadline because there was a delay with a supplier. If the clients sued for damages, professional indemnity insurance would cover the costs to their businesses.

Each policy differs and will have a limit on the financial settlements an insurer will meet.

There are two types of limits set – ‘any one claim’ or ‘aggregate’.

‘Any one claim’ sets a limit on each individual claim, while ‘aggregate’ is a total limit of how much an insurer is willing to pay out over the duration of the policy.

Is it a legal requirement to have professional indemnity insurance?

It is not a legal requirement to have professional indemnity insurance; however, it is advised for many industries and can also be essential to become a member of a professional body or get regulatory approval to operate. Solicitors, financial advisors, some healthcare professionals, architects and accountants all need professional indemnity insurance to be eligible for their regulatory or professional bodies, meaning it is almost compulsory for those fields.

What is the difference between public liability and professional indemnity insurance?

Public liability insurance and professional indemnity insurance are two very different insurance policies, but they overlap very slightly. They both cover legal expenses and damages, but for different incidents.

Public liability insurance deals solely with injury and damage to property of a third party. This could be a customer, supplier, or another member of the public. It is a fundamental part of business insurance and is particularly important if a business premise is open to the public or other visitors or the policyholder carries out work on client sites. Public liability insurance is not designed to cover employees.

Professional indemnity insurance deals with the financial costs a client faces as a result of poor service or mistakes by a policyholder. There is a wide range of incidents a policyholder could be held responsible for, and injury or death could be one of those.

Suppose it was found that a policy holder’s negligence or a mistake was to blame for the injury or death of a client, its employee or customer. In that case, professional indemnity insurance could be activated. For example, if a mistake made by an architect-led to a house falling down with someone inside, the architect could be sued for damages.

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