Law Firms

Professional indemnity insurance is a form of liability cover, giving you protection in the event of claims by a third party for professional negligence. This will cover things such as design, advice and specifications, and differs from product liability in that it covers claims arising from the provision of professional services rather than the sale of physical products. As well as negligence, claims could include error, unintentional breach of intellectual property rights and loss of documents or data. It covers damages and the legal fees and costs incurred in the defence of a claim.

Professional indemnity cover should be purchased by anyone providing professional advice or services, from traditional professions such as lawyers and architects, to more recently emerged professions like IT and management consultants. Sometimes it will be a requirement to have professional indemnity insurance. This could be the case where you work in a regulated profession, or a minimum level of cover could be stipulated in a contract, for example joint contracts tribunal (JCT) construction contracts.

This depends on a number of factors, including the type of work you do, the risk that someone will take legal action against you, the potential size of a claim, and any requirements stipulated by a contract or professional body. Three times annual fee income is a good starting point, but also considers the worst case scenario and the likelihood of it happening.

You also need to think about how long you need cover for. Professional indemnity insurance is written on a 'claims made' basis, so while it is in force it will cover you for claims made during the policy period rather than just covering the services you provide in that period. As claims can occur long after you provide the service, you should keep cover in place for several years: typically six, although some contracts specify up to twelve.

It is essential to disclose all material information otherwise claims could be declined. Buyers must complete a proposal form, which becomes part of the policy contract. These forms are designed to capture all the relevant information but, if you feel an important part of your professional service has not been disclosed, speak to your insurer or broker. Whoever is completing the form should check with all senior executives that what is on the form is correct to their knowledge.

Consideration should also be given to retroactive cover. When you take out PI cover for the first time you may be able to buy retroactive cover to give protection for future claims that arise from professional services performed prior to the inception of your first policy. If organisations are established and have not bought cover before, they must consider existing exposures and whether they need retroactive cover back to when they started trading. There is also a claims disclosure clause that must be carefully observed. The company must disclose any potential claims, or circumstances that may give rise to a claim, to insurers within a specified timeframe. In some policies this is worded as 'immediately'. In other policies the notification requirement is 'as soon as is practicable', which allows the policyholder a far higher degree of latitude.

Getting it wrong can be hugely expensive. Failing to disclose material information could mean a claim is declined. Likewise, if you do not take out sufficient cover you could find yourself having to meet the additional costs. Organisations also need to think about the damage to their reputation when a claim is made. They need to establish a plan as to how to minimise the damage, and put in place protocols with the insurer to ensure claims are handled in a timely and efficient manner.