Professional indemnity insurance is typically associated with professions in which advice is given as a matter of course – for example, for legal and medical experts. In these industries, such insurance is mandatory, that is, required by law as a condition of doing business. However, there are other industries in which purchasing professional indemnity (PI) insurance is not legally required, but where indemnity claims could potentially arise. These include advertising and consultancy businesses, amongst others.

Professional indemnity insurance covers individuals and businesses from the financial implications of personal or financial injury caused by the advice or services offered. The size of cover required will differ markedly depending on the industry, the size of the business, and any specific risks. For example, medical professionals will likely require a higher threshold than those in the advertising or IT industries, although the consequences of making a mistake in these could still be too expensive to risk.

Over- vs under-insuring

As in all cases with insurance, both under-insuring and over-insuring for professional indemnity could represent an unnecessary expense. Under-insuring risks resulting in substantial financial losses to you or your business in the event of a claim. As a general rule, then, it is always worth erring on the side of caution and setting your policy higher than you think you will need. However, spending much more than you have to on a professional indemnity policy is also an unnecessary and regular outgoing. For this reason, it is worth seeking professional advice to establish the maximum cover you are likely to need.

In some instances, you will not be completely free to set your policy limits. Certain industries and professional associations have requirements for professional indemnity coverage, meaning that in order to practice you will need to be insured to this level (though you may choose to extend your cover higher than the legal minimum). Architects, solicitors and independent financial advisers are some examples, though there are many others. Additionally, even if you work in an industry where professional indemnity insurance is not mandatory, some contracts you take on may include agreeing to a minimum level of PI cover.

Setting the right limit

A specialist in professional indemnity insurance will be able to help you establish what your ideal level of cover will be, but there are a number of broad principles to bear in mind when estimating your policy limits. Some policies will include investigation expenses and payment of legal costs in the event of a claim whereas others will not; if they do not then you should make sure you factor this into the final amount, or you could be landed with legal costs even if the damages are paid by the insurance company.

You should consider what the potential costs of the worst case scenario are; professions in which there is the risk of bodily injury (such as medicine or engineering) will likely need higher cover, since this can be very expensive to settle. You will also need to take into account the length of time you have been practising; in many cases (such as medicine and architecture) your exposure will increase over time, since it may take many years for some faults to come to light.

There are two other significant factors you may need to consider in purchasing professional indemnity insurance. One is if you are handling sums of money for clients – in which case, total losses in the event of fraud could be extremely high. The other is if you are providing similar advice or services to a large number of clients. In this case, although the individual losses may be smaller, their effect could be multiplied if a large number of clients come forward with similar grievances.

This article was supplied by the leading firm of Irish insurance brokers, Robertson Low, established in 1995 and the only Irish incorporated ‘Lloyd’s broker’.