What is Professional Indemnity Insurance?

If you own or otherwise manage a business, you may have encountered professional indemnity insurance when looking for an insurance policy. Professional indemnity insurance is a kind of liability insurance. Specifically, it protects your business from the financial consequences of any liability arising from your negligence. This article will explain professional indemnity insurance in more detail. It will also consider important legal and commercial matters.

Professional Indemnity Insurance

Professional indemnity insurance protects your business from any negligent acts it may commit. As the name suggests, if you are found liable for negligence, the policy’s purpose is to pay out any damages you would otherwise be responsible for. Consider the following example. 

However, having a professional indemnity policy in place could mean the insurer pays for the claim instead of your business paying out the value of the claim. This is a much better alternative.

Do I Need Professional Indemnity Insurance?

Professional indemnity insurance is primarily for businesses that provide professional services. This commonly includes:

• solicitors;
• accountants;
• consultants;
• financial advisors; and 
• other businesses that provide some sort of advice that their customers rely upon in making some sort of decision.

Depending on your industry, you may be under a legal obligation to acquire professional indemnity insurance. For example, a necessary condition for practising as a registered solicitor or account is obtaining professional indemnity insurance. If solicitors and accountants do not obtain indemnity insurance, they will breach regulatory laws, resulting in the revocation of their practising licence. 

That said, not all professional service providers have regulators. Therefore, your business may not necessarily need to obtain professional indemnity insurance. However, any prudent business should still obtain comprehensive professional indemnity insurance. Another way of looking at professional indemnity insurance is that it allows your business to operate without having to reserve a substantial portion of cash to meet potential liability claims. 

What Are My Obligations to the Insurer?

As with all insurance policies, you can never lie or misrepresent anything at any point to your insurer. If you do and you later need to make a claim, deceit or misrepresentation entitles the insurer to deny coverage, even if it was accidental. Additionally, the insurer can also pursue you for damages. 

What Are the Key Terms of a Professional Indemnity Policy? 

As with all insurance policies, you must review the policy terms. Otherwise, the policy may not cover certain risks. Below are the key terms of a professional indemnity policy. 

1. The Schedule 

The schedule sets out the items particular to your insurance policy. For instance, the schedule will list the:

• coverage, which refers to the maximum amount the insurer will pay out under the policy; 
• policy period, which is usually for a period of time; 
• name of the insured (i.e. your business) and the insurer; and 
• territorial limits may be restricted to the UK or apply abroad.

2. The Insured 

Insurance policies will only pay out if an insured loss happens to the insured party. Therefore, say you have an insurance policy in your name, but your business suffers some sort of loss. Even though you are insured under the personal policy, the insurer will not pay out your business. This is because your business is not insured. 

3. The Insuring Clause 

This is a term in the policy that specifies what is insured. For instance, under a professional indemnity policy, the clause typically states that your business is insured against all civil liability arising from negligence. This would not protect your business from any property damage nor any consequences of criminal liability. 

Is There Legal Cost Coverage?

Technically this is a provision within the insuring clause. This specifies to what extent your insurance policy includes legal cost coverage. Most professional indemnity policies will cover at least some of your legal costs. However, if it does not, you must meet these costs yourself. Alternatively, you may obtain a policy specifically for legal costs. 

Where a policy does cover legal costs arising from a liability claim, it will either be:

• exclusive; or 
• inclusive. 

Exclusive legal cost coverage means that any amount paid towards legal costs does not come from the total coverage available under the policy. Usually, exclusive legal cost coverage will come with its own specified coverage. 

Alternatively, inclusive means that the entire policy must meet the cost of legal fees. Therefore, say you have coverage for £5m. Nevertheless, another party brings a claim against your business for £5m in damages and £1m in costs. In this instance, you will be on the hook for the costs. 

Limitations and Exclusions

Most insurance policies do not provide blanket coverage. For instance, a professional indemnity policy will not cover liability arising from intentional conduct. If an employee intentionally misleads a client, any subsequent loss the client claims against your business would not be covered under the policy. 

​​Key Takeaways 

An indemnity insurance policy protects your business from any claims any third parties may make against it. More specifically, professional indemnity insurance protects your business from any negligent acts it may commit. If you are found liable for negligence, the policy’s purpose is to pay out any damages you would otherwise be responsible for.

If you need further guidance, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. So call us today at 0808 196 8584 or visit our membership page.

Frequently Asked Questions