How much professional indemnity insurance do I need?

A question customers often ask us is: 'How much professional indemnity insurance do I need?' And what we usually advise them is: as much as you can afford.

Yes, we know. Not much help, is it?

But bear with us because there’s method in our vagueness.

The problem we have is that there isn't a one-size-fits-all rule. That's because every business is different. And every business faces different risks.

That makes it difficult for us to say precisely how much professional indemnity (PI) insurance is enough. So we get you to tell us instead. We do that by making you think about these things: what you do, who you do it for, and what it's worth.

Your answers help build a picture of your business's risks - the things that could go wrong and ultimately lead to a claim against you. And that, in turn, helps determine the level of PI cover you need.

How to calculate how much professional indemnity insurance you need

Figuring out how much professional indemnity insurance you need can be a little confusing. There’s lots to consider but don’t overcomplicate it. Take it step-by-step using our list below:

1. What you do (your liability)

What's your business? What do your clients ask you to do for them? What could go wrong? Worst-case scenario, how much will it cost to put right?

Also, how much business do you do? If your turnover is relatively high, you've either got lots of clients or fewer, high-value clients. Either way, claims are more likely and/or will be for more money.

Your professional indemnity insurance needs to cover the total cost of correcting your mistakes and the legal costs of a claim against you.

For example, a client sues you and the total bill to fix your error, compensate them, and pay each party's legal expenses comes to, say, £300,000.

If your level of cover is only £250,000 you’re faced with meeting the £50,000 shortfall yourself. Ouch.

2. Who you do it for (your clients)

Are your clients small businesses or large multinationals? Are they in 'rich' industries like banking, finance, or IT? Are they by-the-book or more laid back?

As a consultant or contractor, you’re up against it. Big companies won’t hesitate to unleash the might of their legal department or corporate lawyers if they think there’s a reason to claim. And if they do claim, they won’t go easy.

If you find yourself on the receiving end of an expensive-looking lawsuit, your policy needs enough weight to cover all the potential costs of defending you and compensating your client.

3. What it's worth (your contract values)

What are your average and largest fees? What’s a typical total project value? Is your client expecting either a revenue boost or a cost saving as a result of your work?

Don’t assume you can only be sued for the amount your client pays you.

To some extent, you can limit your liability by contract, sure. But if things go wrong and a court decides you’re liable for more, you’ll have to pay it.

If your work is part of a larger project and your client alleges your mistake is responsible for delaying or disrupting it, they’ll sue you for their total loss. Not just your part in it.

Bear in mind many projects, particularly those in architectural work or involving large-scale IT changes, can cost many £millions. You don’t want a bill like that through your door.

Required levels of professional indemnity insurance

There are many industries for whom PI insurance isn’t optional. For accountants, surveyors, and many other professionals, it’s a necessity.

If you’re a member of a professional body, like the ACCA for accountants or RICS for surveyors, you’ll need to maintain a minimum level of of professional indemnity insurance cover to qualify as a member. The requirements are different for every professional body.

You might also be legally required to have professional indemnity insurance if you land a big contract. Especially if it’s in the public sector. This gives your client peace of mind that any problems won’t leave them out of pocket.

Other considerations when deciding how much professional indemnity insurance is enough

Legal costs

Professional indemnity (PI) insurance protects you against allegations of negligence and the legal costs of defending you, regardless of the claim's validity.

That's important because even if you're 100% sure you didn't mess up, it doesn't mean clients or third parties can’t claim you did. And if that happens, doing nothing about it isn't an option.

Getting a solicitor to help won't be cheap. The cost of your defence could easily run into many £tens (or even hundreds) of thousands if the claim is complicated or protracted.

In fact, in many claims, the legal costs are larger than the amount that’s claimed for.

So make sure you choose enough cover to pay a claim's potential legal costs.

‘In the aggregate’ or ‘any one claim’?

The type of professional indemnity policy you go for is almost as important as its level of cover. Here's why:

In the aggregate
If you buy a policy with, say, £250,000 cover 'in the aggregate', that's the maximum amount the policy will pay for the accumulated total of all claims made against you in one policy period.

If you were unlucky enough to have, say, three claims against you and their combined costs are more than £250,000 then you’d be a bit stuck.

Any one claim
If, on the other hand, you bought £250,000 cover for ‘any one claim’ then you're covered for unlimited claims, up to a maximum of £250,000 for each one.

Past work

A word of warning about reducing your level of cover. We're sometimes asked about this by customers who've been working on high-value contracts that have come to an end.

The thing about reducing your level of cover is that it changes your policy retrospectively too. You should always think about your previous work and consider whether your insurance is still enough to pick up any claims that could arise from it.

Most claims come from jobs and contracts you’ve already completed and they’ll be subject to the level of cover you have now, not what you had when the work was done.

Still not sure about how much PI cover you need?

We can’t give a recommended level of professional indemnity insurance in this blog. As you’ve seen, it depends on your individual circumstances.

We know how confusing getting the right PI insurance can be, though. We’re here to answer any questions you have and guide you towards the cover that’s right for you. Just give us a call on 0345 222 5391 and we'll be happy to help.

In the meantime, remember that budgeting for insurance (at whatever level of cover) is always going to be easier – and cheaper – than budgeting for a disaster.

And that's why we advise you to buy the highest level of cover you can afford.

Image used under license from Shutterstock.