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How to work out your professional indemnity level of cover


Creative Commons dice by Johan Larsson_Flickr

Bite the bullet

So you've decided to buy some professional indemnity insurance. Good on you.

Talk to us about it and one of the first questions we'll ask is "how much do you want?"

It's unlikely you've given it much thought. And even if you have, you probably don't know what the answer is. After all, what's enough? What's too much?

And that's the tricky bit.

Because the words 'level of cover' might not mean much to you but they're actually pretty important. No pressure or anything but you need to get it right.

Mixed messages

What we're really asking is "if the worst happened, how much do you want your insurer to pay?"

This is when you need to do some proper thinking. So let's take it a step at a time:

  1. Put on your pessimistic hat for a few minutes.
  2. Write down your biggest, most valuable, or highest-risk client's name.
  3. Think about the work you do for them. Think about the mistakes you could make.
  4. Assume you make the worst possible mistake and that client's out of pocket because of it. They'll want you to make good and compensate them.
  5. Work out how much money your worst-case mistake could cost. Is it twice the value of what you charged them to do the work? Ten times the value? More?
  6. Add your largest contract value to the number you come up with.
  7. Add your annual turnover.
  8. Add 50% for legal costs.
  9. Write down the figure you've got – no matter how scary it looks.
  10. Take off the hat.

OK, good work.

The figure you have in front of you is what the insurance world calls your 'maximum probable loss'. Note the word 'probable'. It's not definitive.

And, although it's a good idea to work this out using your most valuable or risky client as a base, bear in mind a claim can come from anyone you've worked for. At any time. For any amount of money.

Given these unknowns, it's wise to choose a level of cover higher than the figure you've written down. But whatever you have in front of you, we'd say don't go less than £250,000. Or, better still, £1m.

Go large 

How much higher is up to you, but we recommend buying as much as you can afford. Because if the worst does actually happen, you'll want to know your business is truly protected. No gaps.

And yes, we know insurance is another expense in an already expensive world. And yes, you could spend a couple of hundred quid elsewhere and have much more fun.

But take it from us – you don't want to second-guess Mr Hindsight. The smug so-and-so always has the last laugh.

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