Understanding Private Indemnity Insurance: What You Need To Know

Private indemnity insurance, also known as professional indemnity insurance, is a type of business insurance that covers companies, consultants, contractors, and freelancers in the case of a client claiming that their work, service, or advice has caused them a loss, be it financial or reputational. It covers legal costs and other expenses incurred in defence, as well as damages or costs awarded to the client. It is not a legal requirement but is often necessary for regulatory or professional bodies.

What does private indemnity insurance cover?

Private Indemnity Insurance, also known as Professional Indemnity Insurance (PI), is a type of business insurance that covers the policyholder in the event of financial loss due to claims of negligence or malpractice. It is designed for professional firms and individuals and covers them if a client or third party suffers financial loss due to their work.

PI insurance covers legal defence fees and compensation payments if a client sues the policyholder. This includes covering financial loss, personal injury, or property damage caused by the policyholder. It also covers the cost of mistakes made when providing professional services, including negligence, errors and omissions, breach of duty, and civil liability.

Specific scenarios covered by PI insurance include:

• Professional negligence claims: If the policyholder gives incorrect advice or makes a mistake that causes financial loss for a client.
• Defamation and libel: If the policyholder produces or supports libel statements about a client or competitor.
• Breach of confidentiality: If the policyholder shares sensitive information or business-critical information without permission, resulting in financial loss.
• Breach of copyright: If the policyholder infringes on copyrights, trademarks, or intellectual property.
• Loss of documents or data: If the policyholder loses or damages important or sensitive documents or data.
• Employee cover: If an employee of the policyholder commits a malicious act that causes a loss for a client.

PI insurance is not a legal requirement but is often required by regulatory or professional bodies. It is particularly relevant for professionals who provide advice, services, or designs or handle sensitive data and intellectual property.

Who needs private indemnity insurance?

Private indemnity insurance, also known as professional indemnity insurance, is a type of business insurance that covers the costs of legal fees and compensation payments in the event of a client taking civil legal action against a business. This insurance is designed for companies and consultants that provide professional services, including advice, designs, and specifications, to clients.

• Accountants: Accounting professionals are required by their regulatory bodies to have private indemnity insurance. This insurance can protect them in the event of claims arising from incorrect advice, negligence, or breach of confidentiality.
• Architects: Given the potential impact of flawed architectural designs, architects are among the professionals who need private indemnity insurance. This insurance can provide financial protection in case of claims related to errors, omissions, or breach of duty.
• Financial Advisors: As financial advisors are considered high-risk due to the nature of their work, they often require private indemnity insurance. This insurance can cover them in the event of claims resulting from incorrect advice, breach of confidentiality, or negligence.
• IT Professionals: With the increasing reliance on technology, IT professionals play a crucial role in many businesses. Private indemnity insurance can protect them from claims related to negligence, breach of contract, or faulty services.
• Management Consultants: Management consultants often work with sensitive information and provide strategic advice. Private indemnity insurance can be essential for them in case of claims arising from breach of confidentiality, negligence, or incorrect advice.
• Marketing Professionals: Marketers can benefit from private indemnity insurance, especially when dealing with digital content and intellectual property. This insurance can cover them in the event of claims related to defamation, breach of copyright, or errors in their work.
• Healthcare Experts: Some healthcare professionals, such as doctors and nurses, may require private indemnity insurance. This insurance can protect them from claims related to negligence, incorrect advice, or breach of confidentiality.
• Solicitors: Solicitors are exposed to potential claims from clients and often need private indemnity insurance. This insurance can cover them for legal fees and compensation payments in case of negligence, breach of duty, or incorrect advice.
• Freelancers and Contractors: Freelancers and contractors who provide professional services or advice to clients can benefit from private indemnity insurance. It can protect them from financial losses due to claims of negligence, defamation, or breach of contract.
• Designers: Designers, including graphic, interior, and web designers, can benefit from private indemnity insurance. This insurance can cover them in case of claims related to faulty designs, breach of copyright, or defamation.

It's important to note that while private indemnity insurance is not always a legal requirement, certain regulatory and professional bodies may mandate it for membership. Additionally, some clients may only work with businesses that have this insurance in place. Therefore, it is crucial to assess the specific needs and requirements of your industry and clients when considering private indemnity insurance.

Is private indemnity insurance a legal requirement?

Private indemnity insurance is a type of medical coverage obtained through a private source, as opposed to a public, government-sponsored healthcare program. It is similar to publicly funded programs like Medicare and Medicaid.

Private indemnity insurance is not a legal requirement. However, it is regulated by state and federal laws and provides individuals with the flexibility to choose any doctor or medical provider without being limited to a specific network.

On the other hand, public liability insurance and professional indemnity insurance are types of business insurance that cover compensation claims. While public liability insurance covers claims of injury, illness, or property damage by a member of the general public against a business, professional indemnity insurance covers claims made by clients for professional negligence or mistakes.

Professional indemnity insurance is also not a legal requirement, but it is strongly recommended for businesses that provide specialist advice, services, or designs, or those that handle data and intellectual property. Most professional institutes and associations require their members to have some form of professional indemnity insurance.

How much does private indemnity insurance cost?

The cost of professional indemnity insurance varies depending on several factors. These include the type of profession, the annual turnover, the claims history, the number of employees, the level of cover, and the risks associated with the industry.

Rates for this insurance generally range from 0.25% up to 5% of fee income or annual turnover, but can be higher or lower depending on the risk factors and market competition. Minimum premiums will also apply and will vary between insurers. The cost of cover will depend on the type of profession, with high-risk professions paying more than lower-risk ones. For example, a financial advisor is considered high risk and will pay more than a recruitment consultant.

The level of cover also affects the cost, with higher levels of cover resulting in higher premiums. However, the increments in price are not reflective of the increments in cover. For instance, increasing cover from $1 million to $2 million might only result in a 35% increase in price.

The size of the business also impacts the cost of professional indemnity insurance, as larger businesses with more employees tend to have a greater chance of something going wrong and a claim being made against them.

Some companies offer professional indemnity insurance starting from £4.74 or £8 per month, with higher policies covering up to £5 million or £10 million. It's important to note that these prices may vary depending on the specific circumstances of the business.

How much cover is needed?

The amount of cover you need depends on the type of business you run: its size, the kind of work it does, and the scale of the contracts it works on.

Professional indemnity insurance can protect work done in the past, so the amount of cover needed depends on how established the business is and how much of its previous work it wants to protect.

An independent financial adviser can help you determine the level of cover needed, based on your risk profile and turnover. They will ask questions such as:

• What is the biggest mistake your business could make?
• How complex would these issues be to resolve?
• Where could it cause financial damage, and how much damage could it cause?
• How financially powerful is your client? If they were to claim against you, do they have the resources available?
• Without insurance, could you afford the legal costs needed to defend yourself?

Insurers will set premiums based on factors such as the size and type of business, the nature of the work, and the income generated by the business.

Rates for this insurance generally range from 0.25% up to 5% of fee income or annual turnover, depending on the usual risk factors and market competition. But rates can also be higher or lower than this.

Frequently asked questions