Professional indemnity insurance: What is it and how does it work? (2024)

Jan 18, 2023 Share

Mistakes are an inevitable part of any business. These lapses, however, can result in huge financial losses and reputational damage, particularly if a client decides to sue. This is where professional indemnity insurance comes into play. Although not always legally required, this type of coverage is crucial for many businesses, especially for those that provide expert or advisory services.

What is professional indemnity insurance?

Professional indemnity (PI) coverage is a type of business insurance policy that protects companies against claims of financial losses resulting from alleged or actual negligence during the fulfilment of a professional service. Depending on the industry, this form of protection can be referred to by different names – for example, errors and omissions (E&O) insurance in real estate, professional liability insurance (PLI) in construction, or malpractice insurance in the medical and legal fields.

1. Claims-made policies: Cover claims only if the error was committed and the lawsuit was filed when the policy was in effect.
2. Occurrence policies: Cover any claims that have taken place during the coverage period, even if the charges were filed after the policy lapses.

What is the purpose of professional indemnity insurance?

Regardless of the industry, each professional needs to perform their jobs without the fear of unintended consequences. This is the purpose of professional indemnity insurance. This type of coverage allows professionals to act in the best interests of their clients and businesses knowing they are protected in the event they make a mistake.

What does professional indemnity insurance cover?

A professional indemnity insurance policy covers legal and settlement costs arising from service-related mistakes. These include:

Professional negligence

This happens when a professional fails to perform their duties and obligations to a required standard. Some instances where professional negligence occurs include an accountant giving poor financial advice, causing a client to miss out on huge tax benefits and a medical professional administering the wrong medication, resulting in severe complications, or the death of, a patient.

Breach of contract

This occurs when a professional breaks the agreed-upon terms and conditions of a binding contract. This includes failure to deliver a specific service stated in the contract, resulting in huge financial losses for a client.

Misrepresentation

This happens when a professional makes a false statement that causes a customer to agree to a contract. This can include real estate agents padding the square footage of a property to raise the property’s value or an insurance professional inflating service costs or charging for services that were not rendered. If misrepresentation is discovered, the affected party can void the contract and seek damages.

Professional misconduct

This occurs when a professional violates the rules or standards set by their profession’s legal body. This includes:

• Failure to get a client’s informed consent
• Withholding important information to clients
• Working while impaired
• Breach of confidentiality
• Inadequate documentation and record keeping

What does professional liability insurance exclude?

Professional liability policies do not cover:

• Legal or medical expenses resulting from bodily injury.
• Property damage that customers suffer while a service is being provided.
• Lawsuits filed by employees due to accusations of wrongful termination or workplace harassment.

The first two are covered by general liability insurance, the third is covered by employment practices liability coverage.

Why do I need professional indemnity insurance?

Any individual or business that offers professional services or advice to clients should take out professional liability coverage – and for good reason. Allegations of negligence, inaccurate advice, and misrepresentation can result in exorbitant costs that can easily drain a company’s financial resources, whether they are proven liable or not. Professional indemnity coverage can protect them financially from the huge expenses arising from lawsuits.

When is professional indemnity insurance required?

Businesses in certain industries are required, either by law or industry standards, to take out professional liability insurance. Some clients may also require a professional or a company to have this type of coverage in place before agreeing to do business. These are some of the professions where coverage is necessary in the US:

Medical practitioners

Medical professionals are required by law to carry medical malpractice insurance. These include:

• Doctors and physicians
• Nurses
• Dentists
• Psychologists
• Occupational, physical, and speech therapists
• Other healthcare providers

This type of professional indemnity insurance protects practitioners in the medical field against claims of negligence resulting in a patient’s injury or death.

Lawyers

Currently, legal malpractice insurance is mandatory only in two states – Idaho and Oregon. Nearly half of all US states, however, have implemented some form of disclosure rules requiring lawyers to notify clients whether or not they carry coverage.

Real estate professionals

Taking out errors and omissions insurance is compulsory for real estate agents and brokers in several states. These include:

• Colorado
• Idaho
• Iowa
• Kentucky
• Mississippi
• Nebraska
• New Mexico
• North Dakota
• Rhode Island
• South Dakota
• Tennessee
• Wyoming

Requirements, however, vary between states. In Colorado and Nebraska, for instance, real estate agents are required to get a policy with a minimum annual aggregate limit of $300,000. In Iowa and Mississippi, meanwhile, the minimum limit is $100,000.

Insurance professionals

Several states also require insurance agents and brokers to carry errors and omissions coverage. Similar to those for real estate professionals, each state has a different set of requirements. In Rhode Island, industry professionals need to have coverage with a minimum aggregate policy limit of $500,000. In Tennessee, the minimum limit is $100,000.

Government contractors

Under the Federal Acquisition Regulation (FAR), businesses working on government projects are required to carry professional liability insurance to protect them from “the perils to which the contractor is exposed.” These businesses include:

• Construction firms
• Professional services providers, including financial and public relations firms
• IT specialists, including consultants and cybersecurity experts
• Transportation and logistics services providers
• Pharmaceutical and healthcare services providers

Whether professional indemnity insurance is mandatory for a certain occupation also depends on the region. Professionals in Canada and the UK are not required by the law to take out insurance, although several industry bodies make coverage compulsory for individuals and businesses to operate. In Australia, PI insurance is required for occupations considered high-risk, including:

• Accountants
• Architects
• Bookkeepers
• Engineers
• Legal practitioners
• Healthcare professionals
• IT consultants
• Marketing consultants
• Real estate professionals

Is professional indemnity insurance compulsory?

Not all occupations are legally required to take out professional indemnity insurance. But even if coverage is not always compulsory, industry experts advise most individuals and companies to purchase this type of financial protection, especially if they are in the business of providing expert or advisory services.

List of industries where professional indemnity insurance is compulsory

As mentioned in the previous sections, not all occupations are required by the law to secure professional liability insurance. However, some industry associations make it compulsory for professionals in their field to take out coverage for them to practice or operate their businesses.

What is another name for professional indemnity insurance?

Professional indemnity insurance is also called professional liability insurance. It provides compensation against damages caused by mistakes made by a company or a professional while working.

• Negligence
• Breach of contract
• Misrepresentation
• Fraud
• Defamation

An insurance company would usually take care of the expenses incurred during the defense against such a suit and the amount compensated in favor of the plaintiff.

• The cost of professional indemnity insurance varies depending on the type of business or profession, the level of coverage desired, and the size of the business or profession.
• Professional indemnity insurance is typically purchased on an annual basis.
• Most professional indemnity insurance policies have an insurance deductible
• Professional indemnity insurance policies typically have a limit of liability, which is the maximum amount that the insurance company will pay for covered claims.

If you are a business owner or professional, it is important to consider purchasing professional indemnity insurance. It can help protect you from financial losses resulting from claims of negligence, errors, or omissions in your work.

Who should have professional indemnity?

Professional indemnity insurance covers professionals offering guidance and service to other people. This includes professionals such as:

• Accountants
• Lawyers
• Doctors
• Engineers
• Architects
• Consultants
• Real estate agents
• Insurance agents
• Financial advisors

Professional indemnity insurance guarantees compensation against financial losses arising from allegations of malpractice, errors, oversight, or other omissions.

• The client is overcharged by the IRS and pays additional taxes and penalties due an oversight of an accountant
• A lawyer's error causes his client to lose the case
• The patient is injured because the doctor made a mistake during treatment
• The client loses money on account of the bad advice from a consultant
• A client loses money due to bad investment advice given by a financial advisor

What does professional indemnity not cover?

Professional indemnity insurance is comprehensive in its coverage, yet it doesn’t cover everything. Here are some of the most common exclusions:

• Intentional wrongdoing: professional indemnity insurance does not cover claims of intentional acts of wrongdoing like fraud, dishonesty, and criminal behavior.
• Pre-existing conditions: Claims arising from losses suffered before professional indemnity insurance was taken out are not covered.
• Fines and penalties: Penalties and fines, imposed by regulatory bodies, for example, are not covered by professional indemnity insurance.
• Bodily injury and property damage: Professional indemnity insurance does not cover bodily injury and property damage, but general liability insurance would usually cover these.
• Disputes with employees: Professional indemnity will not cover disputes between a professional and an employee, like a claim for unlawful dismissal or discrimination.
• Contractual disputes: Contract disputes between professionals and their clients are not covered by professional indemnity insurance.

It is crucial to go through your professional indemnity insurance policy to understand what is included. For any questions, talk to your agent/broker.

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