Professional Indemnity

Professional indemnity insurance (also known as professional liability insurance) is a large, rapidly growing sector of the commercial insurance market, with many insurance companies actively fighting for market share and offering different types of products both online and off-line.

It’s important to have an understanding of professional indemnity insurance in order to make an informed decision on which product is right for your business. Here we explain about professional indemnity insurance, covering some of the most important points to consider.

This guide can also be circulated to Directors and Senior Managers in your firm for their general awareness and for risk management purposes. 

What is professional indemnity insurance?

To explain professional indemnity insurance (PI), you need a clear definition of what it is. Essentially, it is an insurance product designed for professional firms and people which covers them in the event of certain errors made during the course of their business. The policies available mainly cover professional negligence, errors or omissions, breach of professional duty and civil liabilities.

This type of insurance means that professional people can work without the fear that they may be sued by a client or a third party for problems that occur as a result of their professional activities. In short, it allows professionals to carry out their work with greater confidence and peace of mind.

Professional indemnity insurance was created to provide much needed financial protection against the risks and personal losses to which professionals were heavily exposed. The origins of this insurance go back to London in the 1700s. At that time, the established professions such as accountants, solicitors and architects traded with ‘unlimited liability’ as a guarantee of the quality of their work.

When they made a mistake, they would pay any remedial compensation to their client from their own pockets, limited only by the value of their assets. As such, they could literally ‘lose the shirt off their back’ if their mistake was significant enough. So the creation of insurance to protect against these losses was a much-needed solution. 

Nowadays, the increasing reliance of businesses on the contracted services provided by many occupations has vastly increased the scope of the term ‘professional’, and a professional is regarded as any person or firm offering specialist advice or services.The risks are as significant as ever and mistakes can still lose a professional their business and their reputation without adequate professional indemnity insurance.

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How much does indemnity insurance cost?

The cost of cover will depend on the type of profession, annual turnover, the claims history etc. For example, a Financial Adviser is regarded as high risk and will pay more than a lower risk Recruitment Consultant.

Rates for this insurance generally range from 0.25% up to 5% of fee income or annual turnover, depending on the usual risk factors and market competition. But rates can also be higher or lower than this.  

Minimum premiums will also apply which will vary between insurers. The ‘minimum premium’ is the insurance company’s starting point for insuring a risk, and they can vary significantly between companies. For example, the minimum premium could be £100 or £1,000 depending on the insurance company. 

Insurance premium tax of 12% is also payable on insurance premiums, but premiums are not subject to VAT.

Where do I buy professional indemnity insurance?

Professional indemnity policies are mainly obtained from specialist insurance brokers like us. Because of the complexities of the risks and the wide range of different products available, going to a broker with the right expertise is invaluable to ensuring you buy the right cover at the right price. A broker will understand your business needs and help you to ascertain potential areas of risk that you may not have identified yourself. Request a Quote

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