When we’re asked “how much professional indemnity insurance do I need?” our usual advice is: as much as you can afford.
Yes, we know. Not much help is it?
But bear with us because there’s method in our vagueness.
The problem we have is that there isn’t a one-size-fits-all rule. Every business is different.
That makes it difficult for us to say how much is enough. So we get you to tell us instead. We do that by making you think about these things: what you do, who you do it for and what it’s worth.
Your answers build a picture of your ‘risk’ – what your policy protects you against. All we have to do is found out how much risk there is.
What you do (your liability)
What’s your business? What do your clients ask you to do for them? What could go wrong? Worst-case scenario, how much will it cost to put right?
Your professional indemnity insurance needs to cover the total rectification costs of your negligence and the legal costs of 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.
Who you do it for (your clients)
Are your clients small businesses or large multinationals? Are they in ‘rich’ industries like banking or finance? Are they by-the-book or more laid back?
As a lone consultant or contractor you’re up against it. Big companies won’t hesitate to roll out the legal department if they think there’s a reason to claim. And if they do claim, they won’t go easy.
If you find yourself on the receiving end of an expensive-looking lawsuit, your policy needs enough weight to cover all the potential legal costs of defending you.
What it’s worth (your contract values)
What’s your average and largest fee? What’s a typical total project value? Is your client expecting either a revenue boost or a cost saving as a result of your work?
Don’t assume you can only be sued for the amount your client pays you.
You can limit your liability by contract, sure. But 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.
Professional indemnity insurance protects you against allegations of negligence and the legal costs of defending you, regardless of the claim’s validity.
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 need someone to make that argument in the first place.
‘In the aggregate’ or ‘any one claim’?
The type of policy is almost as important as its level of cover. Here’s why:
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 against you in one policy period.
If you were unlucky enough to have, say, three claims against you and their combined costs are more than £250,000 then you’d be a bit stuck.
Any one claim
If, on the other hand, 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.
This is probably worth a bit more reading. Click here for more info on these two types of policy.
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.
There’s more about this here.
Still not sure?
Talk to us, we’re happy to help. Or read how to work out your level of cover.
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.