Professional Indemnity Insurance: Protecting Service-Based Businesses

Professional indemnity insurance (PII) mitigates risks related to professional liability. It is designed to protect professionals from client claims that arise from potential negligence, errors, and omissions. PII is crucial for accountants, freelancers, attorneys, and other service providers.

In this guide, we will go over everything you need to know about professional indemnity insurance, including its benefits, importance, and claims process.

Understanding Professional Indemnity Insurance

Professional indemnity insurance (PII) is also commonly known as professional liability insurance or errors and omissions insurance.

PII typically covers:

• Defense costs for liability claims against you
• Compensation and settlement costs
• Negligence and mistakes
• Copyright infringement
• Personal injuries (e.g. libel and slander)

Difference between PII and general liability insurance

General liability insurance covers a broad range of claims. It is more generic than PII. General liability insurance policies primarily cover:

• Bodily injury: If someone gets injured on the business premises or as a result of your business operations, general liability insurance can provide financial assistance. The most common claim is when a customer slips and falls in a store.
• Property damage: General liability insurance covers damages to third-party properties.
• Personal injury: Libel, slander, and other personal injuries can be covered by a general liability insurance policy.

On the other hand, professional indemnity insurance offers more specialized insurance coverage, tailored to address the unique risks faced by service-based businesses. It bridges the gaps in general liability insurance coverage so that your business can be better protected.

Common misconceptions about PII

1. Only large companies need PII

Professional indemnity insurance is a good idea for any service-based business. Companies of all sizes can be sued for liability, resulting in significant financial loss. A small company, sole proprietorship, or startup can be overwhelmed by even a single professional liability claim. Because of this risk, all companies that offer professional services should consider professional indemnity insurance.

2. General liability insurance is enough

If you offer services to clients and customers, such as legal counsel or graphic design, general liability insurance is often insufficient. General liability insurance only covers basic liability risks. PII is recommended for any business that is based on professional services.

3. PII is too expensive

While the PII premium can feel expensive, especially for smaller businesses just starting up, the coverage provided by professional indemnity insurance generally outweighs the cost. The financial protection and peace of mind are worth the monthly expense. Without adequate PII, a single liability claim could financially devastate the business.

4. I Don’t Need PII If I Have a Limited Liability Company (LLC)

Even if you run a Limited Liability Company (LLC), a customer suing the business for services given can still be costly for the business. If the business goes bankrupt, the owner does not need to use personal assets to pay off the debts. However, what about protecting the business from liability claims to avoid bankruptcy in the first place? That’s where PII comes in.

Types of Service-Based Businesses That Need PII

Here are examples of common service-based businesses that need professional indemnity insurance.

Consultants

Anyone who provides professional consulting services should carry professional indemnity insurance.

Management: Management consultants who provide strategic advice to clients can accidentally cause significant financial loss for the client. Professional mistakes, negligence, and errors can be extremely costly without PII.

IT: Consultants who offer technological solutions and advice should have PII. Incorrect advice and ineffective solutions can result in expensive data breaches, system failures, and other problems.

Financial advisors: Giving financial advice naturally means there is a high risk of causing financial loss for clients. Financial advisors should carry PII to protect themselves.

Freelancers

Freelancers should consider professional liability insurance as needed.

Writers: Freelance writers may be found liable for damages and legal fees if the content they produce has issues with plagiarism or copyright infringement. The client may be sued, and in turn they may sue the freelance writer. To mitigate risks, freelance writers can procure PII.

Designers: Designers face the tricky issue of advertising injuries and copyright infringement. For example, if the client gets sued for having a logo too similar to another company’s trademarked logo, the graphic designer may be sued.

Programmers: If a programmer creates software with serious bugs and security vulnerabilities, the client may sue for damages.

Service providers

Architects: An architect can make errors in their work, resulting in structural issues that cost clients significant resources to fix.

Engineers: If a design is filled with errors or damages other property/people, the engineer may be found liable.

Lawyers: Giving the wrong legal counsel can have serious repercussions. Clients may lose cases and face penalties as a result. They can sue lawyers for legal malpractice if they believe the lawyer was negligent. It’s a good idea for lawyers to carry malpractice insurance.

Healthcare workers: Healthcare practices and mental health counselors can be sued for medical negligence and malpractice. It is crucial for anyone or any organization working in the healthcare field to carry professional indemnity insurance for healthcare — AKA medical malpractice insurance.

Accountants: Accountants deal with client taxes and other financial records. Negligence or errors in accounting work can result in fines and business problems.

Salon services: Beauticians and other salon services should have professional indemnity insurance.

Key Benefits of Professional Indemnity Insurance

Professional indemnity insurance can offer plenty of value. Here are the key benefits of PII.

1. Financial protection in case of professional negligence

The main advantage of professional indemnity insurance is how it serves as a financial safety net. Negligence and errors at work can result in serious harm or financial losses to clients. A business that offers professional services should carry PII to protect against claims of negligence. This insurance could save a business hundreds of thousands, if not millions, of dollars.

2. Coverage for legal costs and awards

Legal defense fees can get expensive if someone files a claim against you. Professional indemnity insurance can cover legal defense costs that are associated with lawsuits against your company. Insurance can help with these fees regardless of whether you are found at fault.

Professional indemnity insurance can also cover the costs of compensation. For example, if you are sued for your client’s copyright infringement case, you might need to pay between $750 to $30,000 depending on the amount awarded. A professional indemnity insurance policy can protect your business and provide substantial financial support.

3. Better business reputation and client trust

Companies and clients that want contractors to work for them often expect you to carry professional indemnity insurance. This protects both of you from liability-related losses. If you don’t have the necessary professional liability insurance, you may lose out on business opportunities.

Choosing the Right Coverage

Let’s go over the main factors to consider when selecting PII coverage.

Coverage limits

The coverage limit of a policy refers to the maximum dollar amount you can receive in insurance payouts. Professional indemnity insurance generally has a coverage limit from $250,000 to $2 million. Businesses should choose a policy limit that aligns with their needs.

There are two types of coverage limits: per-occurrence and aggregate. The per-occurrence coverage limit is how much the insurance company will pay for all claims resulting from a single occurrence. This is regardless of how many people are injured or how much property is damaged. On the other hand, the aggregate coverage limit is the maximum amount that your insurance company will pay out within a single policy period (usually one year).

Exclusions

Insurance exclusions are what is not covered by your policy. Compared to other insurance policies, exclusions for PII can be difficult to spot or understand. Here are common professional indemnity insurance exclusions.

• Criminal acts and intentional wrongdoing
• Breaches of contract
• Discrimination
• Sexual abuse
• Pollution and environment liability

Be sure to thoroughly read your professional indemnity insurance policy for exclusions.

Deductibles

An insurance deductible is the monetary amount that must be paid by the business towards a claim before insurance kicks in. This out-of-pocket expense will vary depending on what policy and insurer you choose.

The higher the deductible, the lower the monthly premium. Choose a deductible that suits your business well in terms of risk tolerance and budget.

Add-ons and customizable insurance

Businesses should tailor PII to their specific needs and risks.

If you’re looking for the best professional indemnity insurance, check out our list of top business insurance providers, which includes:

• Hiscox
• Tivly
• Simply Business
• The Hartford

Costs and Affordability

The cost of your professional indemnity insurance will depend greatly upon factors such as:

Business size: Larger companies will have greater liability risks, requiring more extensive coverage. This can make PII more expensive.

Industry: Some industries face more financial risks. For example, a copyright infringement claim for graphic design might come with a settlement cost of $30,000. A medical malpractice lawsuit could result in a settlement of over $400,000. If you operate in a field with greater risks, you can expect PII to cost more.

Claims history: If your business has a claims history filled with professional negligence-related claims, it can be harder to find PII coverage.

Legal and Regulatory Considerations

Companies need to comply with industry regulations and also meet the professional standards within the industry. PII can help companies fulfill contractual requirements with clients, customers, and patients.

Oftentimes, companies will not work with your business if your business lacks the minimum professional indemnity insurance. PII protects clients and customers, which encourages them to sign contracts with your business.

Claims Process and Handling

1. Notify the insurance provider

It’s important to notify the insurer promptly when an incident occurs. Immediate notification helps ensure you file the claim before any deadlines. You will need to provide basic details about the incident, such as:

• The date of the incident
• Nature of the claim
• Other parties involved

2. Submit documentation

For your PII insurance provider to assess the claim validity, they will require documentation and supporting evidence. Make sure your business keeps detailed and organized records of all contracts, emails, and correspondence related to the incident. Prepare a comprehensive incident report that outlines the events leading up to the claim, as well as actions your business has taken since then.

3. Wait for claim decision

The resolution of a professional indemnity claim can take many months. These insurance claims are relatively complicated. Depending on the nature of the claim and nuances of the case, a PII claims decision could even take years.

Because of how long a claim can take, it is important for companies to thoroughly research PII insurer options and choose a reliable insurance company.

Case Studies and Examples

Let’s go over some real life scenarios where PII is essential, helping companies avert serious losses.

Scenario 1: An accountant helps a company with their tax filings every year. This year, there were errors in taxes, resulting in heavy penalties and interest charges from tax authorities. The company ends up filing a lawsuit against the account for recompense. PII helps cover legal defense and compensation fees.

Scenario 2: A freelance writer is hired to write content for a business’ promotional website. Copyrighted material is unintentionally used without permission. The client gets sued for copyright infringement. In turn, they sue the writer for damages and legal costs. PII covers a significant portion of the legal fees and damages awarded to the original copyright holder.

Conclusion

PII is essential for any business that offers professional services. It provides substantially more coverage than a general liability insurance policy. Your business can tailor a professional indemnity insurance plan so that it protects you from specific vulnerabilities. PII can cover issues that arise from:

• Errors and omissions
• Professional negligence
• Legal defense fees and settlement costs
• Contractual requirements of clients