Professional Indemnity Insurance – Claims Made the Basis of Cover Explained

If you are a professional and are looking at insurance for your business, you may be confused by the different types of insurance available.

If you have other people working for you, employees, or volunteers, you are required by law to have employers’ liability insurance. This covers any accidents or injuries that occur to employees in your workplace. There are other types of optional insurance available, such as public liability insurance, which covers against accidental injury and property damage claims made by members of the public who have injured themselves on your property. For professionals, another relevant type of insurance is professional indemnity insurance, which is required for members of some professional bodies.

Professional Indemnity

A professional indemnity is a form of liability insurance. Unlike other types of insurance which covers a material property, i.e. a house or car, you are not insuring against an object and how much it would cost to replace. Professional indemnity insurance is for professionals who offer professional services or advice and you are insuring against a client being unhappy with the service or advice you provide deciding to take legal action. You need to ensure you have substantial insurance to cover the potential loss that you could face.

You will usually only face a professional indemnity claim when all other options have been exhausted or relationships have soured. Usually, before it gets to the stage of insurers having to deal with a claim, an amicable solution is agreed as not going through the courts is typically preferable to both parties.

Professional indemnity policies work slightly differently from other insurance policies about insurance coverage and claim periods. Other insurance products, such as employer’s liability insurance, cover the period in which the event took place i.e. the policy that was in force when an extension to a house was built, which fell three years later and crushed a car, is the one that would be liable.

For professional indemnity insurance, claims made and reported to insurers during the period of the policy are covered. Therefore, the event that caused the claim, i.e. you advising XYZ Inc to buy a new £500,000 computer system, may have happened before your current policy starting but if they take legal action while your current policy is in place, you are covered.

The downside this is that if for any reason the policy lapse then there is no cover in place. Even a business that ceases to trade or ceases to be involved in a particular area should ideally continue cover in case there is a claim in the future.

When clients are unhappy with your service and decide to contact you regarding this, it is best practice to contact your insurer at this point. The complaint may not be a formal written letter stating their intention to take legal action; it could be anything from verbal criticism to an informal email. However, it can be difficult to know if it will turn into an official claim. For this reason, all insurers state that any event which may give rise to a claim needs to be notified to them.

Although it may seem initially confusing, once you have professional indemnity insurance in place, you can be assured that any mistakes or disagreements are covered and you are free to continue giving out good advice.