Thursday, May 30, 2024

What is professional liability insurance?

Professional liability insurance is a commercial policy that pays the legal and compensation costs of a business should its client or customer claim work it did caused them financial loss. The loss of earnings could be current or future, and also includes the cost to repair the damage caused by the defendant. 

According to NimbleFins, professional liability insurance, also known as professional indemnity insurance, is commonly used in industries where a mistake or a bad service could cause high costs to the client. These include consultants, accountants, and architects.

It is also used in creative and skills-based industries which are more subjective and so a client may claim a brief has not been adhered to. These include tradesmen, graphic designers and interior designers. 

It provides a financial resource to cover legal fees and damages. And it also prevents a business from absorbing the risk and accounting for a potential claim when negotiating a price for its service, making it more competitive. 

Legal fees and a client’s loss of earnings could run into the thousands or millions of pounds, depending on the damage. Policies provide peace of mind for a relatively small fee compared to the risk of the trade and the business. 

What is the purpose of professional liability insurance?

The purpose of professional liability insurance is to give businesses financial protection against the risks of their professional trade. If a business gives expert advice, or sells its knowledge or skills, there is a chance staff could make a mistake, or badly advise a client. If that client loses money as a result of the business’s work, it can be held liable for what could be thousands or even millions of pounds in some cases. 

If it wasn’t for these policies, many could be put out of business, not just by the compensation claims, but by the hefty legal expenses that come with defending a claim. Legal bills can easily run into thousands of pounds, and tens of thousands of pounds, and without professional liability insurance a business could quickly be put into jeopardy.

Professional liability insurance takes away the risk of damages so the business can trade freely. Without this type of insurance, a financial advisor, for example, may be more hesitant and risk-averse in their investment suggestions, which could make them a poorer expert. Or they may charge astronomical fees over fear a client could launch a claim if their advice turns out to be bad. Professional liability insurance, therefore, makes a business a stronger performer and more competitive. 

What does professional liability insurance cover?

Professional liability insurance covers the legal fees and compensation related to a range of scenarios where a business could be accused of negligence, which could include:

Professional negligence: By giving the wrong advice or incorrect information, or failing to deliver what was promised that leads a customer to lose money. 

Defamation: Where a client accuses the policyholder of libel or slander.

Breach of confidentiality: Such as sharing information without permission. This could be done by a dishonest employee or via the business, for example when taking on a new client in a similar market.

Loss of documents or goods: This includes any loss of equipment or belongings but could also include sensitive data which the client had trusted a policyholder to handle. An example of this could be a policyholder accidentally sends a virus to a client wiping their system and the client must pay thousands of pounds to restore the information.

Acts or mistakes by subcontractors.

Bodily injury: If a customer, their employee or other third party is injured due to a policy holder’s negligence.

How much professional liability insurance do I need?

The amount of professional liability insurance a company needs depends on a range of scenarios such as its size, risk of its profession and the value of the work being done for its clients. 

Businesses working in certain professions will have a minimum requirement for professional liability insurance, should they wish to be a member of a regulatory body. For example, the Financial Conduct Authority insists certain firms have continuous cover from the start of a firm’s authorisation, a specific policy excess, as well as a number of other conditions. They must be covered for €1,250,000 for a single claim and an amount equivalent to 10% of annual income, up to £30million in aggregate.

Some clients also insist a business has a minimum amount of insurance before a contract is signed. 

Commercial insurance products are soaring in price in the wake of the coronavirus pandemic, Insurance Journal reports. Providers fear a wave of litigation due to decisions made which turned out to cost money due to the volatile economy.

It is wise to be aware that professional indemnity policies are typically written on a ‘claims made’ basis, with a ‘retroactive date’ if changing providers without a gap in cover. These mean a provider will honour claims made against the business before its premium start date, so long as it had continuous cover. It can sometimes take years for a business to realise losses due to advice or a service given to them. 

However, professional liability insurance would only cover a business for the time it was insured continuously. If there was a gap in the policy holder’s insurance they will not be covered for incidents that took place before the gap in cover, even if they had a policy at the time. For example, if a business had professional liability insurance that ran out in January 2021, and wasn’t renewed until March 2021, an incident that took place in December 2020 would not be covered, despite having a policy at that time. However, if a business had continuous cover since 2015, and changed providers in March 2021 to one with a retroactive date clause, the business would be covered for claims as far back as 2015. 

When deciding how much professional liability insurance you need, ask yourself the things that could go wrong, the value of the work being done, the risk of something going wrong, and how much it could cost in compensation if the worst was to happen. 

This can often be difficult for a business to assess and therefore specialist insurance brokers can help make assessments and gather professional liability insurance quotes

Claire James
Claire James
Claire is an accounts manager at Fire Digital UK, an online publishing and content marketing company based in the North West.

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