Being your own boss has numerous perks, but there are many potential downfalls too, even for something as simple as human error. Thankfully, taking out Professional Indemnity (PI) insurance ensures that you and your business are protected should the worst happen - because even the most diligent contractors are held accountable when things go wrong. To understand what PI insurance can do for your business, as well as how much cover you might need, read on.
What is Professional Indemnity insurance?
Professional Indemnity insurance – often referred to as PI insurance – protects you and your business should your client allege that you’ve made an error or omission when providing your services, i.e. inadequate advice, negligence or flawed designs. It covers legal expenses incurred while defending the claim, as well any compensation needed to fix the problem.
Professional Indemnity insurance covers a range of scenarios, including:
- professional negligence (i.e. making a mistake in a piece of work for a client)
- loss of documents or data
- unintentional breach of copyright or confidentiality
- defamation and libel
- loss of goods or money (your own or for which you are responsible).
I’ve never experienced a claim before, why do I need PI insurance?
Regardless of if you’ve been contracting in your field for 20 years or just won your first client, it’s largely impossible to know what might occur during your next project. One small mistake or a momentary lapse of concentration could give rise to a claim either immediately or further down the line.
Clients will often dictate a Professional Indemnity insurance limit in their contract, depending on how large or small the job is. It’s usually the same for industry bodies too so it’s advisable to make sure your limit satisfies your clients' specifications before taking out cover. If you don’t have any client expectations to meet, however, take a worst-case-scenario approach. The amount of Professional Indemnity you need is notoriously difficult to calculate accurately and can be affected by myriad circumstances.
How do I work out how much PI insurance I need?
Imagine the worst mistake you could make in your job. Perhaps you’re an independent software programmer working with the NHS. A fault in your code could leave thousands of patient records unprotected for over 48 hours, during which time huge amounts of sensitive data is stolen. Or perhaps you’re a management consultant working with a large multinational client. You advise certain efficiencies on a huge project to save costs, but the shortcuts you suggest actually triple expenditure, causing your client to have to choose between taking a catastrophic loss or charging their end-client at least double the quoted fee.
How much would these problems cost you to set right? How much compensation for loss of business or data retrieval would you have to pay? How much would it cost you in legal fees to defend yourself at trial and how much would your losses amount to while you’re out of work, or even losing work due to a damaged reputation? That total will be significantly lower than what you should take out as Professional Indemnity cover.
With PI insurance, a limit of £1 million indemnity is typically required at the very least, with other common limits sitting at £2 million and £5 million. You’ll easily find cover starting from £250,000 (suitable for start-ups and small businesses) but we strongly advise you over-insure; if the level of cover taken out isn’t sufficient for your requirements, then you’ll be liable to pay the remaining amount.
The main things to consider whilst taking out PI are:
- The size of the client contract: the bigger the client, the higher your PI limit should be.
- Compensation claims: if you’re working with a national client, like the NHS or BBC, compensation claims are likely to be huge. If you usually work with smaller companies (building websites for local retailers, for example), then you probably won’t be faced with such a huge hit.
- Legal costs: again, the bigger the client, the more expensive the trial can become. Consider how deep your client’s pockets are and ask yourself if you can match them.
Am I required to have PI insurance?
While it’s not illegal to work without it, it’s considered an industry formality that you, as a contractor, obtain Professional Indemnity insurance. Clients will want to ensure that any errors made lie with the contractor that provided the services, and guarantee that the contractor is legally responsible for correcting them. Understandably, they don’t want to pay for any mistakes they aren’t liable for, which means that clients are often reluctant to hire a contractor who doesn’t have the correct Professional Indemnity cover. Some will even include the need for PI cover within their contract, so it’s advisable to have it in place before sealing that all-important deal.
While all contractors should have a minimum amount of PI cover to ensure they have the highest level of protection, some should prioritise this cover. Professionals that are most at risk of a claim being made against them include:
Ever-increasing requirements for data handling, GDPR regulations and rapid turnaround times mean that tech workers can often find themselves overworked. If a mistake is made (a data breach, mishandling client documents, missing deadlines), the results can catastrophic and widespread.
PI claims for those working in advertising, marketing, media or communications are on the rise due to seemingly simple errors such as; booking the wrong ad space, typos in important copy or even missed sales. Although minor mistakes, these can be very costly in the long run.
For more information on how Professional Indemnity insurance can help your business, visit our Knowledge Hub where you’ll find helpful articles on everything from contractor guides to IR35 news.