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Table of Contents
- What is professional indemnity insurance?
- Is professional indemnity insurance a legal requirement?
- What does professional indemnity insurance cover?
- Does my business need professional indemnity insurance?
- How much does professional indemnity insurance cost?
- How much professional indemnity cover do I need?
One of the (many) responsibilities you have as a small business owner is staying on top of your insurance and making sure you’re covered in the event that something goes wrong.
From protections for employers to public liability cover, there is a range of small business insurance policies which you need to consider… and professional indemnity insurance is another type of coverage to add to your list.
Unlike some other forms of small business insurance, professional indemnity insurance isn’t a legal requirement, but that doesn’t mean it’s not a good idea to have it.
In fact, if you provide professional services, offer consultancy, give advice, or handle people’s information in the course of your business activity, then you should make professional indemnity cover a priority.
If you already know that you need professional indemnity insurance, NerdWallet can help you find the right cover for your small business.
Otherwise, read on to learn how professional indemnity insurance works and to check whether your business would benefit from being covered.
What is professional indemnity insurance?
Professional indemnity insurance is designed to cover you if you provide designs, specifications, advice or instructions as part of your job.
Generally speaking, professional indemnity insurance protects you from claims for loss or damage in the event that you are accused of negligence and a client suffers a financial loss arising from any of your business services.
Just as an example, say you run your own consulting business: a line of work in which you make a living by making professional recommendations to clients.
If a client ends up making a financial loss as a result of your bad advice and blames you for the loss, then this is where your professional indemnity insurance would come in.
Professional indemnity insurance can cover the cost of legal fees and compensation if you’re accused of providing negligent service or offering poor advice which loses your client money.
With professional indemnity insurance, you could also be covered in the event that you are accused of causing a financial loss for a client due to a breach of confidentiality, defamation, infringement of copyright, loss of documents or mistakes made due to the dishonesty of your employees.
Is professional indemnity insurance a legal requirement?
There’s no law that says you can’t do business unless you have professional indemnity cover.
However, if your business operates in a sector where service-based disputes are more common, you may find that you need professional indemnity insurance.
This is because certain professional bodies and industry regulators require their members to have professional indemnity insurance in place before they join.
Architects, for example, are required to take out professional indemnity insurance by the Architects Registration Board.
Similar requirements apply for accountants and financial advisers seeking to join the Financial Reporting Council (FRC) and for solicitors in the Solicitors Regulation Authority (SRA).
Even if you don’t work in a field where a regulator requires it, you may find that certain clients will refuse to work with businesses or contractors who don’t have their own professional indemnity cover.
» MORE: Do I need business insurance?
What does professional indemnity insurance cover?
If a client has made a financial loss as a result of your business services, and you’re accused of being at fault, then your professional indemnity insurance could pay for:
- legal fees incurred while defending a claim made against you
- compensation costs and damages arising from a successful claim made against you
Professional indemnity insurance may also include:
- run-off cover for claims made against your business after it has ceased trading
- cover for the cost of recovering lost or damaged data or documents
It’s worth knowing that you could face a compensation claim from a third-party even if you provided a service for free. So just because you haven’t charged for a professional service, that doesn’t mean you can’t be taken to court and squeezed for compensation if you make a mistake.
» MORE: A guide to small business insurance in the UK
Does my business need professional indemnity insurance?
While professional indemnity insurance is not a legal requirement, there are various types of businesses where cover is strongly advised.
You should consider taking out professional indemnity cover if:
- your business provides advice and consultancy services
- your business provides an expert or professional service
- your business handles people’s information
- your line of work can lead to disputes over quality, vision or copyright
- you provide training in a sensitive area, such as first aid
Some clients may insist you take out professional indemnity insurance before they’ll work with you.
Plus, professional indemnity insurance is a must in the eyes of various regulatory bodies. This is true for the following professions:
- solicitors
- accountants
- architects
- chartered surveyors
- financial advisors
- some healthcare professions
There are no hard and fast rules, but you should also consider taking out professional indemnity insurance if you are a freelancer, a contractor or if you’re self-employed.
Similarly, you should prioritise professional indemnity cover if your business operates in any of the following sectors:
- IT consulting
- business consulting
- interior design
- graphic design and web development
- engineering
- design
- construction
- law
- PR and advertising
- coaching
- education
- town planning
If you’re ready to get serious about professional indemnity cover, NerdWallet can help.
Simply tell us some basic information about your small business and we’ll help you compare professional indemnity insurance quotes.
Why does my business need professional indemnity insurance?
For certain types of businesses – like consultancy firms, lawyers, and architects – it’s fairly clear how poor advice or professional negligence could lead to a crippling compensation claim.
However, if you are an interior designer, for example, you might be scratching your head and wondering why indemnity cover should matter to you.
But imagine this scenario: a client who signed off on your initial designs becomes unhappy with your work and demands compensation to cover the cost of rectifying it.
In this case, you’d be covered for your legal costs and settlement expenses by professional indemnity insurance.
Even if you work in a profession where there isn’t an obvious risk of you facing a compensation claim for giving bad advice or providing a poor service, you might be surprised at the various circumstances where professional indemnity insurance could be useful.
If you are a web developer, for example, you run the risk of potential data breaches if you fail to sufficiently secure the site. Alternatively, you could cause a loss of revenue if the site were to go down due to your coding error.
Or imagine that, as a designer, you accidentally use a copyrighted image in your work, resulting in a breach of copyright.
All these situations could result in you being taken to court and accused of negligence by a client seeking compensation.
And in all situations, you’d probably end up being grateful for your professional indemnity cover.
How much does professional indemnity insurance cost?
How much you’ll have to pay for professional indemnity insurance is likely to depend on a range of factors, and the cost of any policy is likely to be highly specific to your business circumstances.
That’s why we at NerdWallet have developed a quick quote comparison tool for business insurance. If you tell us a few details about your business, we can present you with a range of quotes in just five minutes.
Generally speaking, the level of cover you want, the size of your business, and your business sector all play a role in determining the cost of professional indemnity insurance.
If your business faces a higher risk of claims or is particularly exposed to accusations of negligence, you are likely to be charged more for your professional indemnity cover.
Your quote could also be affected by other factors, including the value of your contracts as well as your qualifications, experience and your approach to running your business.
Is professional indemnity insurance tax deductible?
Most types of business insurance are tax deductible – meaning you can subtract their cost from your trading profits. This has the effect of reducing your overall self-assessment tax bill.
Professional indemnity insurance is a tax-deductible allowable expense, as it’s deemed to be a cost necessary for the proper running of your business.
How much professional indemnity cover do I need?
Before you take out professional indemnity insurance, you’ll have to decide on what level of cover your business needs.
If you are taking out professional indemnity insurance because a client or a professional body requires you to, you could start by asking them what their minimum requirements are.
Ultimately, though, it’s up to you – as the business owner – to determine what level of professional indemnity cover you need.
This can be tricky to estimate, but there are a few factors to consider if you want to decide your own level of cover. Think about the following:
- Rectification costs, or how much you’ll have to pay (including fees and third-party charges) to resolve and rectify any serious mistake you’ve made.
- How much compensation you could be required to pay, including not only your fees but also for consequential losses incurred as a result of your mistake.
- Legal fees incurred by defending yourself, as well as fees incurred by your client if they pursue you for a serious mistake.
You should also consider the value of your contracts and the size of your clients, bearing in mind that larger firms, which have their own legal departments, have a greater ability to pursue you and secure legal and financial recourse.
If you take out too little cover, you run the risk of being under-insured, meaning you and your business may not be fully financially protected in the event that something goes wrong.
Image source: Getty Images
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