The risks of cancelling your professional indemnity insurance

You might think cancelling your professional indemnity (PI) insurance is a smart move once you retire, start taking on fewer clients, or a contract comes to an end.

Why keep paying for something that doesn’t seem necessary anymore? Surely, since you're no longer working at full capacity or you’ve stopped trading, the risk of a claim is gone, right?

Wrong. Unfortunately, for most professionals, it’s just not that simple…

Or maybe your business costs are rising and you need to find ways to cut costs. Everyone’s feeling the pinch right now...maybe you’re thinking professional indemnity insurance is something you can afford to cut loose.

Whatever your reasons are for wanting to cancel your PI insurance, here’s what you need to know before you do.

Why cancelling your professional indemnity insurance is a risky move

Professional indemnity claims are the most frequent in the UK, accounting for over a quarter (26%) of all annual business insurance claims.

You might think employers’ liability and public liability insurance claims are more likely, but that’s clearly not the case. Small businesses face a genuine threat from PI claims and shouldn't overlook them.

And here’s the really important part: professional indemnity works differently to other types of insurance...

PI (and medical malpractice insurance) operates on something called a ‘claims made’ basis. This means that for you to be covered, the policy needs to be active not only when the work was done but also when the claim’s made.

This is particularly important if you're in a profession where mistakes or misunderstandings could come to light months, or even years, after the work’s been carried out.

So keep your insurance in place until you’re confident no one will bring a claim against you. There might be ways to bring down the cost, though, which we’ll talk about later.

What’s the worst that could happen?

We don’t want to catastrophise. But don’t underestimate the impact if someone makes a claim, and you don’t have insurance to protect you.

Picture this: You’re a freelance business consultant and you decide to switch to a full-time role working for someone else. Your last client is months in the past, so you think there’s no harm in cancelling your PI policy.

Then, out of nowhere, you get a call from said client. They’re claiming they’ve lost money due to the advice you gave them months ago. Yikes.

You had insurance at the time you worked with them, but now you don't. You’re up a creek without a paddle.

Professional indemnity claims can get complex…

So you’ll probably have to hire a solicitor, and we all know that won’t come cheap. And it could end up costing you even more if the client wins.

The last thing you want is to be financially responsible for compensation or court fees that could run into the thousands, or even more, in extreme cases. Best think twice before cancelling that professional indemnity insurance policy, then.

Look before you leap

If you’re still on the fence about cancelling your professional indemnity insurance, here are a few important things to keep in mind.

Some professions come with higher risks than others. If you’re in an industry where a mistake could lead to significant financial loss for your clients (like architecture, surveying, or consulting), your exposure to claims is higher.

Most of these riskier professions have regulatory requirements when it comes to professional indemnity insurance. For example, the UK Architects Registration Board requires architects to have PI.

Even if you’re not legally required to have it, cancelling could still damage your credibility with clients. Having insurance shows you’re a professional who’s prepared for any eventuality.

If there’s a possibility that your previous work might come under scrutiny later down the line (especially in industries where mistakes take time to surface), you should think long and hard about when it’s safe to cancel your insurance.

Keeping business costs down

If the main reason you’re thinking about cancelling your professional indemnity insurance is its rising cost, it’s worth looking into alternatives before giving it the chop.

You don’t necessarily need to cancel your cover completely. Sometimes, you can adjust your policy to lower the cost while still getting some protection. If you’ve stopped doing certain activities, you’re earning less money, or have less clients than before, you might be able to reduce your cover.  

Just make sure you don’t lower your cover more than you should. Being underinsured can be just as damaging as cancelling completely. It’s always worth talking to your insurer or broker about options to fit your new circumstances.

If you decide to look for a new, cheaper policy, keep your wits about you. If it’s considerably cheaper, there’s usually a reason. Make sure it’s covering you for all eventualities and that you’re not paying large excess fees.

Times can be tough, and cutting down on business expenses might seem like a quick win. But here’s the thing: if something goes wrong after cancelling your professional indemnity insurance, can you afford to handle it on your own? If a claim is made, the financial impact could be far worse than the cost of keeping your insurance.

What’s PI run-off cover and why’s it important?

If you’re closing your business or stepping away from your profession, run-off cover is probably the best solution.

It protects you from claims made after you’ve stopped trading, as they as they relate to work you did while your PI insurance was still up and running.

The cost of run-off cover usually goes down the longer you have it, with the exception of certain risky professions, but gives you the same protection for past work.

Professional bodies usually require chartered accountants, surveyors, and architects to have run-off cover for a number of years after they retire.

Without run-off cover, you’d have to pay for any claims made after your policy ends by yourself. And we’re sure you’d rather not have something like that hanging over your head.

The bottom line

When it comes to cancelling your professional indemnity insurance, the risks far outweigh the savings in most cases. And the last thing you want is for a PI claim to catch you off guard.

If in doubt, keep your cover in place or at least explore other options, including run-off cover. A little bit of caution can save you a whole lot of trouble in the long run.

You can find out more about professional indemnity insurance, or if you’d like to chat about your situation with an insurance expert, just give us a call on 0345 222 5391.

Image under license from Shutterstock.