If you offer advice or instructions to customers in any way, you may need to take out a professional indemnity insurance policy. Knowing whether your business needs one can help you avoid legal trouble and fines from mistakes in the future.
Learn everything you need to know about professional indemnity insurance in this article, including:
- What is professional indemnity insurance?
- Who is it meant for, and is it a legal requirement?
- Is it for sole traders or limited companies?
- What does it cost, and can I expense it?
- How is it different from public liability insurance?
- Avoid time and stress from your business with Countingup
What is professional indemnity insurance?
Professional indemnity (PI) insurance is a type of insurance coverage that helps businesses if they offer advice or instructions to customers.
It works by protecting your business if something’s gone wrong for your customers after they’ve followed your advice but experienced a financial loss as a result. Unfortunately, even if your professional advice comes with years of experience and industry knowledge, sometimes things can go wrong on rare occasions (whether this is through an accident or a mishap).
And so, having this protection can help you avoid expensive legal troubles if a customer ever decided to sue you for the financial loss (since they might argue that it was your fault). Moreover, it can also help you build a good reputation as someone who cares about their customers as they will see the trust and security you offer even if things go wrong.
Who is it meant for, and is it a legal requirement?
PI insurance is intended for businesses offering professional services and expert advice (not goods or physical products). This business category includes typical examples like financial analysts and advisors, lawyers and accountants. However, this business category is vast and can also include architect firms, engineers, strategic or marketing consultants and much more.
To make it easier to decide whether your business needs (or could benefit from) professional indemnity coverage, consider whether you offer advice or recommendations to customers. While professional indemnity insurance isn’t a legal requirement for all service businesses, some regulatory bodies and professional societies require their members to have it.
For example, if you work in financial services, the Financial Conduct Authority (FCA) may require your business to hold PI insurance. Similar requirements are in place for solicitors across England and Wales, Scotland, and Northern Ireland. Other sectors like consulting and engineering are slightly less regulated, and so it may be considered best practice to have it anyway.
Is it for sole traders or limited companies?
PI insurance can be purchased for any eligible type of business, regardless of whether you’re a sole trader or limited company. The more important thing is whether or not you offer professional services to customers, not what type of business structure you operate within.
What does it cost, and can I expense it?
PI insurance costs can vary depending on the coverage size your business needs – sole traders may have cheaper rates as they only have to pay for themselves. In contrast, limited companies with multiple employees may need to take out a more comprehensive package to cover multiple staff.
You can reduce your premiums by joining professional societies and attending development courses to make sure your industry knowledge is always up to date. This can help you avoid any negligence and claims on your indemnity insurance in the first place. Similarly, a long history of working in your industry may also help your insurance premiums as you’ll be able to evidence a clean record and strong customer reputation.
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Fortunately, businesses can expense insurance costs on their accounts and claim tax relief on this basis. Although, you should still aim to find cheaper coverage as this still impacts your net profits. Note that this shouldn’t come at the cost of the quality of your coverage. Make sure you do your research and compare a number of different providers to find a suitable policy for your business and budget.
How is it different from public liability insurance?
Professional indemnity insurance is aimed at service businesses needing protection against damaging financial outcomes for clients. In contrast, public liability insurance is aimed at businesses with office or shop locations for customers to visit, protecting against physical harm.
If your business is a service business with physical office space for customers, you should aim to have both, but note that both policies cover very different types of damage. That’s why knowing whether your business needs indemnity and/or public liability insurance is vital to have comprehensive protection against any accidents.
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