What level of professional indemnity insurance cover do I need?

Too much of a good thing?

If we’re asked “what level of professional indemnity insurance cover do I need?” our usual advice is this: if it’s not been stipulated by your client, buy as much as you can reasonably afford.

On the face of it that doesn’t seem like much help. And you’d be forgiven for thinking we’re bound to say something like that. Bear with us though because there’s method in our apparent vagueness.

The problem we have is that there’s no hard and fast, one-size-fits-all rule. Every business is different. So, the factors to consider are: what you do, who you do it for and what it’s worth.

And because those things are different for everyone, it’s worth going a bit deeper.

Your liability (what you do)

What are your clients asking you to do? What could go wrong? Worst-case scenario, how much would it cost to put right?

Your professional indemnity insurance needs to cover the total rectification costs of your negligence and the legal costs associated with a claim against you

For example, a client sues you and the total bill to fix your mistake, compensate them and pay each party’s legal expenses comes to, say, £150,000.

If your level of cover is only £100,000 you’re faced with meeting the £50,000 shortfall yourself. Ouch.

Your client (who you do it for)

Who are you working for?

As a lone consultant or contractor you’re up against it. Big companies won’t hesitate to roll out the lawyers if they think there’s cause for a claim. And if they do claim, they won’t go easy on you.

If you find yourself on the receiving end of an expensive-looking claim, you’ll want to make sure your policy has enough weight to cover all the potential legal costs of defending you.

Your contract values (what it’s worth)

What’s your average and largest fee? What’s a typical total project value?

Don’t assume you can only be sued for the amount your client pays you.

Even if you limit your liability by contract, if things go wrong and a court decides you’re liable for more, you’ll have to pay it.

If your work is part of a larger project and your client alleges that your mistake has delayed or disrupted that too, they’ll sue you for their total loss. Bear in mind many projects, particularly those in construction or involving large-scale IT changes, can cost many millions of pounds. You don’t want the bill for that through your door.

Legal costs

Professional indemnity insurance protects you against allegations of negligence and also provides cover for the legal costs involved in defending you, regardless of the validity of the claim.

That’s great of course – but we all know that solicitors aren’t exactly cheap. The cost of your defence, if the claim is complicated or protracted, could easily run into many tens (or even hundreds) of thousands of pounds.

Make sure you choose enough cover to pay a claim’s legal costs. It might be proven that there’s no case against you but you still someone to make that argument for you in the first place.

Insurance jargon

‘In the aggregate’ or ‘any one claim’?

The type of policy you’re getting is almost as important as the level of cover it provides. What do we mean by that? It comes down to two things:

In the aggregate
If you buy a policy with, say, £250,000 cover ‘in the aggregate’, that’s the maximum amount the policy will pay for the accumulated total of all claims made in the policy period.

If you were unlucky enough to have three claims against you and their total costs came to more than £250,000 then you’d be a bit stuck.

Any one claim
On the other hand if you bought £250,000 cover for ‘any one claim’ then you’re covered for unlimited claims, up to a maximum of £250,000 for each one.

For a more detailed explanation of policy types, have a read of this.

Accountants take note

Not everyone has to take just an educated guess though. To a certain extent, chartered and certified accountants’ lives are made a bit easier by their professional bodies’ stipulations.

If you’re an accountant or accountancy firm, you’ll need to have a level of cover at least two and a half times your gross fee income for the last financial year. Within that, sole traders need a minimum of £50,000; everyone else a minimum of £100,000.

Still not sure?

Talk to us, we’re happy to help. Or, if you’ve got a clearer idea now of what you need and you’re ready to get your policy, click here and away you go.

In the meantime, always remember that budgeting for insurance (at whatever level of cover) is always going to be easier – and cheaper – than budgeting for a disaster.

So you might as well buy as much as you can afford.