Professional Indemnity Insurance: What Is It and Why Do You Need It?Blog
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Imagine this situation: you are a cybersecurity consultant, and you just started working with a new client. Everything seems to be going great. You equip their system with all the necessary protection and set up the best encryption and spam filters for their accounts. Your client is delighted with your services.
Then, one of their employees clicks on a malicious link in their email and falls victim to a social engineering attack. Cybercriminals gain access to your client’s network and cause severe damage. The client blames you for not setting up a proper defense system or not providing adequate training to their employees. In the epilogue, you can get sued for professional negligence.
If it’s closer to home, picture this scenario instead: you are a lawyer, and you have a loyal client who’s been with your firm for years. That relationship brings a great deal of mutual trust.
As your practice grew over time, you brought on many new clients and swamped yourself with work. And you forgot to file a motion in the name of your long-term client in due time, and they ended up in trial instead of the court dismissing a claim against them. They would most likely sue you for malpractice, no matter how long you worked together.
According to Law.com, four out of five lawyers will get sued at some point in their careers. The odds don’t really go in your favor, right?
You may say this scenario could never happen to you, given how meticulous and experienced you are in your work. Yet, the fact is that even the most accomplished professionals can get sued, even if it’s simply for not satisfying all of your client’s expectations. These lawsuits can end up being very costly and could even sink a small business.
Building your business was probably one of the biggest challenges of your career. Apart from talent, you also had to put in a lot of effort and energy to get where you are today. Since you’ve invested so much into making your career dream come true, it might even be a bit reckless to leave your business unprotected in today’s litigious environment.
Let’s have a look at how vital professional indemnity insurance is for a business.
What Is Professional Indemnity Insurance?
Otherwise known as professional liability or errors and omissions (E&O), professional indemnity insurance provides protection to professionals in the services industries. This type of insurance responds to claims of negligence, oversights, malpractice, or errors your clients allege you committed while providing your services.
If a client, or a former client, thinks that your bad advice caused them financial or reputational damage, they may choose to sue you. Even if your service was top-notch, but it somehow didn’t meet your client’s expectations, they can decide to sue. Professional indemnity insurance would cover the financial losses incurred during the course of a lawsuit against you or your company.
Given that the alleged cause for the lawsuit is not a physical injury or damage to your client’s property, you can’t expect your general liability policy to kick in and cover the costs. Any claim related to your professional practices and the services you provide falls under the professional liability insurance policy umbrella.
Do You Need Professional Indemnity Insurance?
Not every business needs professional indemnity coverage, as it is not one of those policies required by law. Who needs this policy, then? The list includes businesses and individuals that offer expert services, advice, or knowledge to their clients, including attorneys and accountants, among others.
As mentioned, you probably invested a lot of time and resources into getting your education, training, and license to practice inside your chosen profession. Your clients expect a certain standard of service when they come to you, and not living up to that standard could lead to costly lawsuits.
Whether you are a solo practitioner or a part of a bigger firm, you don’t want to risk bankrupting your business over a professional mistake.
So, if you are still wondering whether or not you should purchase a professional indemnity insurance policy, ask yourself these questions:
- Do you offer any kind of professional services to your clients? If you do, can your unintentional error cause them financial or reputational damage?
- Do you provide professional advice that, if misinterpreted, could expose you to claims of professional negligence?
- Do you have access to sensitive client information?
If you answered “yes” to any of these questions, you probably need a policy that would indemnify you from related liabilities. Browse policies that protect you against malpractice.
Every professional service provider is at risk, so no matter if you are a lawyer, accountant, nurse, IT consultant, hairstylist, engineer, designer, or wedding planner, for example, you should consider obtaining your professional indemnity policy.
Note that for certain occupations, such as doctors, nurses, or lawyers, this type of insurance is commonly known as malpractice insurance, and the claims filed against them are usually the claims of malpractice.
What Does Professional Indemnity Insurance Cover?
As long as your error or negligence was unintentional, your indemnity insurance would pay for your legal costs when defending the claim. It will also cover any damages awarded to the plaintiff by the court or the settlement amount if both sides agree to settle the case.
Since it covers a wide array of professions, it responds to various errors, such as:
- Poor advice or professional negligence: No matter how experienced you are in your job, anyone can make a mistake that can be perceived as professional negligence. Whether you misjudge the situation and advise your client not to settle but go to court instead, or you miscalculate your client’s taxes, or simply order the wrong cake for your client’s wedding, you will be responsible for your error.
- Breach of confidentiality (including copyright infringement): If you accidentally release any of your client’s information without their permission, you are breaching their confidentiality. If the item you share is their protected intellectual property, you commit copyright infringement, and your client has every right to sue.
- Misrepresentation: This error is particularly related to lawyers who promise a certain level of service or a favorable outcome to their clients and fail to deliver what they promised.
- Breach of contract: Simply put—if you sign a contract with someone and don’t honor your end of it, the other party has every right to sue you. Supposing that the breach was an oversight, your professional indemnity insurance will cover your legal losses.
- Defamation acts: Slander or libel can cause severe reputational damage to your clients. If you aren’t careful about how you handle your communications, you can give grounds for a claim against your company.
How Much Does Professional Indemnity Insurance Cost?
There are many factors that influence the precise cost of professional indemnity insurance. Starting with the industry you are in, considering that certain professions carry more risk than others. Professionals working in investments, for example, should expect their insurance premium to be higher than that of a graphic designer. Attorneys may also see a higher cost of professional indemnity insurance for the risk of malpractice.
The size of your business is another determining factor. For example, if you are a solo-practicing lawyer, you can expect to pay less than a firm with five attorneys. Beware that in the legal profession, the amount of experience you and your colleagues have also influences your insurance premium.
Your insurer will also look into your claims history to determine the amount of risk for your policy. The more claims you had in the past, the higher your premium will be for the future policy period. A professional indemnity insurance policy is written on a claims-made basis, meaning that it will cover the events and claims made against you during its validation period.
Work with your broker to ensure you get the right amount of coverage you need. If you don’t have a policy in place or think you might be underinsured, consult with our experienced brokers about the best coverage options for your business.
Feel free to sign up to Embroker’s digital platform and get your professional indemnity insurance quote in 20 minutes.
If you’re curious about the difference between general liability versus professional liability insurance, continue reading to learn about the nuances of each, how they’re similar, and how they differ.