A question customers often ask us is: 'How much professional indemnity insurance do I need?' And what we usually advise them 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. That's because every business is different. And every business faces different risks.
That makes it difficult for us to say precisely how much professional indemnity (PI) insurance 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 help build a picture of your business' risks - the things that could go wrong and ultimately lead to a claim against you. And that, in turn, helps determine the level of PI cover you need.
3 things to help you decide 'how much professional indemnity insurance do I need?'
1. 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?
Also, how much business do you do? If your turnover is relatively high, you've either got lots of clients or fewer, high-value clients. Either way, claims are more likely and/or will be for more money.
Your professional indemnity insurance needs to cover the total cost of correcting your mistakes and the legal costs of a claim against you.
For example, a client sues you and the total bill to fix your error, compensate them and pay each party's legal expenses comes to, say, £250,000.
If your level of cover is only £200,000 you’re faced with meeting the £50,000 shortfall yourself. Ouch.
2. Who you do it for (your clients)
Are your clients small businesses or large multinationals? Are they in 'rich' industries like banking, finance, or IT? Are they by-the-book or more laid back?
As a consultant or contractor, you’re up against it. Big companies won’t hesitate to unleash the might of their legal department or corporate lawyers 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 costs of defending you and compensating your client.
3. What it's worth (your contract values)
What are your average and largest fees? 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.
To some extent, 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 your mistake is responsible for delaying or disrupting it, they’ll sue you for their total loss. Not just your part in it.
Bear in mind many projects, particularly those in construction or involving large-scale IT changes, can cost many £millions. You don’t want a bill like that through your door.
Other considerations for deciding how much professional indemnity insurance is enough
That's important because even if you're 100% sure you didn't mess up, it doesn't mean clients or third parties can’t claim you did. And if that happens, doing nothing about it isn't an option.
Getting a solicitor to help won't be cheap. The cost of your defence could easily run into many £tens (or even hundreds) of thousands if the claim is complicated or protracted.
So make sure you choose enough cover to pay a claim's potential legal costs.
‘In the aggregate’ or ‘any one claim’?
The type of professional indemnity 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.
A word of warning about reducing your level of cover. We're sometimes asked about this by customers who've been working on high-value contracts that have come to an end.
The thing about reducing your level of cover is that it changes your policy retrospectively too. You should always think about your previous work and consider whether your insurance is still enough to pick up any claims that could arise from it.
Most claims come from jobs and contracts you’ve already completed and they’ll be subject to the level of cover you have now, not what you had when the work was done.
Specific PI requirements
Not everyone has to take an educated guess about how much professional indemnity insurance they need though. Some contracts, especially in the public sector, demand a minimum level.
Certain professional bodies, like those for architects and accountants, also have stipulations. Membership for accountants and accountancy firms is typically reliant on a level of cover at least two and a half times their gross fee income for the last financial year.
Still not sure about your professional indemnity level of cover?
If pressed for an actual figure, we'd say don't go for less than £250,000 worth of cover. Ideally for each claim rather than the total of all claims. You can get lower levels of cover but the price difference is sometimes so small it's often not worth bothering with. If it helps, our most popular level of PI cover is £1m.
If you still have questions, then call us on 0345 222 5391 and we'll be happy to help.
In the meantime, remember that budgeting for insurance (at whatever level of cover) is always going to be easier – and cheaper – than budgeting for a disaster.
And that's why we advise you to buy as much as you can afford.
Image used under license from Shutterstock.claimsfreelancersinsurance explainedmanaging riskrunning a business