Professional Indemnity Insurance – What is it, and why do I need it?
You may be looking to set up your own design business after being employed by others, or you may be starting on your own, but among the first things that need to be considered is Professional Indemnity Insurance. In this article from our partner, MFL, Mark Philmore, Client Director explains more.
What is it, and why do I need it?
You will be offering services to clients and expect that those services will be provided with reasonable skill and care and will achieve the client’s objectives. While most projects are completed with no issues, every once in a while, a client will prove to be difficult. Problems will be encountered during the provision of the services or mistakes will be made.
Whatever the case, when a project becomes difficult or a client feels aggrieved, there is always a risk that the client may look to claim against you for wasted costs, remedial work or any other losses they believe they have suffered. A claim against you can be daunting, especially when the client alleges they have suffered a loss. But in these cases, you can turn to your Professional Indemnity Insurance. This is a type of insurance specifically designed to cover your practice for claims which arise out of the conduct of your professional business.
However, the cover goes further and will also assist when dealing with circumstances that could give rise to a claim.
MFL and your insurers will provide advice and assistance when dealing with any claims and, should it be necessary, your insurance policy will be there to cover any financial losses claimed by the client, subject to the policy excess. As a result, a Professional Indemnity policy is important for any practice as it will help protect you when dealing with any claims.
Things to be considered when arranging Professional Indemnity Insurance
Cost vs. Benefit
While it can often be tempting to go for the cheapest option on the market, especially if you are starting out, it is important to bear the old adage ‘you get what you pay for’ in mind.
It is possible to go online and purchase a cheap Professional Indemnity policy, but you should always ensure that the product you are buying will provide the level of cover and support you are expecting.
Our role as your insurance broker is to discuss your requirements and provide clear and concise details of the nature of the cover, together with details of the services offered to you. We have relationships with the major UK insurers, which means we can provide competitive premiums, but we may not always be the cheapest option on the market.
In any walk of life, it is rare that you can find a cheap product and great service. We pride ourselves on offering value (competitive premiums and great service), and believe we are the best solution for your business.
How much cover should I buy?
A common question relates to the level of cover you should purchase and, as this can vary from £100,000 to £10,000,000 and will determine the cost of the cover, it is an important consideration.
Unfortunately, as there is no hard and fast rule, we would also recommend that you contact us to discuss your requirements in details. However, as a starting point, you could consider the following questions:
- What is the value of the project?
- What is the absolute worst case scenario for a project and what would this cost to fix?
- What are the clients asking for as part of your appointment?
This can be a daunting question, but it can have serious ramifications for your practice if you select a level of cover that may not fully cover any potential claims. As a result, it is a subject that needs to be considered carefully.
How long do I need to maintain cover or a certain level of cover for?
One of the key differences between Professional Indemnity Insurance and other insurance policies is that it is written on a ‘Claims Made’ basis. What this means is that the policy in force at the time the claim is made against you, deals with it rather than the policy in force at the time the work was done.
As an example, you are asked to complete a project in 2020, but the client doesn’t make a claim against you until 2022. As a result, it is the policy in force in 2022 that deals with the claim rather than the cover in place at 2020.
As such, it is important to realise that the need to maintain cover will continue long after any projects are completed and may even extend beyond your eventual retirement. In view of this, we would also recommend that cover is maintained throughout your career with provisions made to cover any potential liabilities into your retirement.
When can a claim be made?
Another factor to be considered when selecting the level of cover and the future renewals of the policy is the period within which a claim can be made against you.
The starting point when considering the period within which a claim can be made is the Limitation Act 1980 and the Latent Damage Act 1986, which provide that a claim can be brought up to six years after the work was completed or three years after the client could reasonably be expected to know they had a claim. This is also subject to an absolute time-bar of fifteen years, often referred to as the ‘Long Stop’, which prevents any claims being made after this point.
So, as a starting point, you can be liable for any work for at least 6 years.
However, when considering the period of liability, it is also important to remember the terms of any appointments with the clients as they can also set out clear time limits within which claims can be made or obligations to maintain cover for a certain period of time.
By way of an example, any contract signed ‘Under Deed’ will create a liability period of 12 years and will often state that the agreed limit of indemnity will be maintained for the same period.
In addition to the implications for your Professional Indemnity Insurance, it is important to note that if you alter the level of cover or fail to maintain it for the agreed period, you may also be in breach of the contract.
There are likely to be a number of other factors that need to be considered when taking out or renewing Professional Indemnity Insurance and we are happy to answer any questions you may have.