As a self-employed contractor, you aim to deliver exceptional service to your clients. However, despite your best efforts, unforeseen circumstances can sometimes occur. This is where having professional indemnity insurance in place can help.
Professional indemnity insurance, also known as PI insurance, provides cover if a client claims that your professional services, advice or designs are inadequate, not as expected or result in financial loss for the client.
This insurance covers legal costs and other expenses incurred in your defence, as well as damages or costs that may be awarded to the client.
Contractor UK’s preferred insurance partner, Markel Direct, explain exactly what professional indemnity insurance is and how it can protect you as a contractor.
Do contractors need professional indemnity insurance?
If you provide any advice, professional services (including consulting or contracting) or designs to your clients, having professional indemnity insurance can be crucial.
In many cases, contractors are required to have professional indemnity insurance in accordance with a client contract or their industry body's regulatory standards.
Even if you are not required to have professional indemnity insurance, without it, you could expose yourself to:
- Significant legal fees from claims of negligence
- Compensation payments to your clients
- Lost income from time spent addressing any allegations
As a self-employed contractor running your own business, professional indemnity insurance can protect both your finances and reputation when a claim happens.
Clicking this button will take you to a Quote and Buy facility provided and operated by our preferred insurance partner, Markel Direct.
What does professional indemnity insurance cover?
Professional indemnity insurance helps to cover the cost of legal claims made against your business for mistakes or negligence in your professional services.
This includes circumstances where your client suffers a financial loss or damages because of:
- Professional negligence – errors in work or poor advice given to clients
- Unintentional breach of copyright – for example, using someone's picture in advertising without their permission
- Defamation and libel – such as making a false claim about a competitor
- Unintentional breach of confidentiality – sharing confidential client information without consent
- Loss of documents or data
- Loss of money or goods under your responsibility
If a claim of this nature is made against you, professional indemnity insurance can financially cover legal costs and expenses as well as compensation that may be awarded to the client or third party, if you are found to be at fault.
Clicking this button will take you to a Quote and Buy facility provided and operated by our preferred insurance partner, Markel Direct.
Professional indemnity claim examples
Backup failure causing irretrievable data loss
You supplied and managed a virtual server for a client. The work of a subcontractor revealed that the automatic backup you were responsible for had unknowingly failed, wiping out five months of financial records. Your client claims against you for negligence. Professional indemnity insurance covers your legal defence costs and the settlement compensation owed to your client.
Project overran causing breach of contract
You underestimated the time it would take to complete a CRM migration and the system missed the agreed UAT window. This resulted in your client needing to hire temporary staff to keep operations running during the delay. Your client claims there’s been a breach of contract due to negligent project management and wants you to repay the cost of hiring temporary staff. Your professional indemnity insurance covers your solicitor’s defence fees and manages to prove that you were not negligent, with delays on the client’s side pushing the agreed timescale back.
Email error leading to a sensitive data leak
During a data migration, a password reset link for a new health records portal was emailed to the wrong user with the same name. The user is able to access another person’s data and makes a complaint to the regulator who later issues a fine. Your client takes legal action against you for negligent data handling and breach of GDPR. Professional indemnity insurance is able to cover the legal costs as well as covering the compensation you have to pay to your client.
What doesn’t professional indemnity insurance cover?
- Fines and penalties
- Losses from mould, pollution or asbestos
- Employee injuries
- Injuries or losses in joint ventures (only your own products/services are covered)
- Pre-existing circumstances before your cover began
What factors affect the cost of professional indemnity insurance?
- The amount of cover required
- The nature of the activities undertaken
- The revenue generated by your business
Clicking this button will take you to a Quote and Buy facility provided and operated by our preferred insurance partner, Markel Direct.
What level of professional indemnity insurance do I need?
The level of professional indemnity insurance you need depends on the value of your work and potential liability. The level of cover you need may also depend on the contract you have with your client – some clients may specify that you have a certain level of professional indemnity insurance.
Our preferred insurance partner, Markel Direct, provide professional indemnity insurance with cover limits ranging from £50,000 to £5 million.
The different types of professional indemnity insurance policies
Professional indemnity policies can vary from insurer to insurer.
Usually, they are written in one of two ways - on a ‘claims made’ basis or a ‘claims occurring’ basis.
‘Claims made’
A 'claims made' policy covers claims that are reported to the insurer within the insurance period, regardless of when the incident occurred.
Some policies will include a retroactive date – this means that the alleged error or negligence that led to the claim must have occurred after the date specified in the policy. Acts committed before this date would not be covered. If the policy does not include a retroactive date, cover is provided regardless of when the wrongful act occurred.
‘Claims occurring’
‘Claims occurring’ insurance policies only cover loss or damage that occurs during the insurance cover period. Professional indemnity policies are rarely written on this basis and are more typically used in a public liability or employers’ liability insurance policy.
'Any one claim' vs 'aggregate'
A professional indemnity insurance policy can provide either 'any one claim' and 'aggregate' cover. An 'any one claim' policy covers each individual claim up to the full limit within the insurance period. In contrast, an 'aggregate' policy covers all claims up to the full limit within the insurance period.
For example, if two claims of £80,000 each are made against a professional indemnity policy that has a limit of £100,000 per claim, the insurer will cover the costs of both claims since each claim falls within the £100,000 limit. Conversely, if two claims of £80,000 each are filed under a professional indemnity policy with an aggregate limit of £100,000, the insurer will only pay up to the £100,000 limit in total, so the extra £60,000 would have to be covered by the insured individual.
Will I still need professional indemnity insurance if I stop contracting?
Even if you stop contracting, you are still liable for the work you have previously done as a contractor. With this in mind, it’s sensible to stay protected.
Professional indemnity run-off cover protects against professional negligence claims made after a business has stopped trading, such as following a sale or closure. It is crucial for retired business owners, to avoid funding potential defence costs personally without cover.
What other types of insurance should contractors consider?
Along with professional indemnity insurance, there are a range of other insurance products that can protect contractors. These include:
- Public liability insurance
- Employers’ liability insurance
- Legal expenses insurance
- Directors’ and officers’ insurance
- Office insurance
- Cyber and data risks insurance
- Occupational personal accident insurance
How is professional indemnity insurance different from public liability insurance?
| Professional indemnity | Public and product liability |
|---|---|
|
What it covers
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What it covers
|
Who is it for? Any self-employed professional or business that provides advice, expertise or professional services to clients. |
Who is it for? Any self-employed professional, business, group or organisation that interacts with clients, customers or members of the public. |
|
Common claim examples
|
Common claim examples
|
Typical policy limits £50,000 to £5 million |
Typical policy limits £1 million to £5 million |
Do they cover legal defence costs? Yes – legal defence costs and compensation are covered up to the policy cover limit. |
Do they cover legal defence costs? Yes – legal defence costs and compensation are covered up to the policy cover limit. |
Clicking this button will take you to a Quote and Buy facility provided and operated by our preferred insurance partner, Markel Direct.