What level of Professional Indemnity do I need?

Establishing what level of professional indemnity insurance is needed shouldn't be confusing!

Consider these points:

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 £300,000. If your level of cover is only £250,000 you’re faced with a £50,000 shortfall.

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? 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.

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 if you are deemed liable.

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 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 ICEAW, CIMA, ACCA or similar for Accountants, you’ll need to maintain a minimum level of professional indemnity insurance cover to qualify as a member. The requirements can be different for every professional body although they are starting to finally align.

Most Professional Accountancy Bodies now align with ICEAW Pii Regulations @ 01.09.24 as follows:

In general, the minimum limit of indemnity in each policy year must be at least £2,000,000 for any single claim and in the aggregate.

This means that the insurance must be for at least £2million for any single claim or a number of claims totalling £2million across the annual policy period. You must take out a policy of qualifying insurance up to the minimum limit of indemnity of £2million with a participating insurer on an aggregate or each and every claim basis. Above that limit, cover does not have to be with a participating insurer, nor does it need to comply with the approved minimum wording.

Exceptions include Firms that are authorised to conduct insurance distribution activities and legal services work and they may need to obtain additional cover as set out as follows:

· if the gross fee income of a firm is less than £800,000, the minimum limit of indemnity in each policy year for any single claim and in the aggregate, must be equal to two and a half times its gross fee income, with a minimum of £250,000

· If a firm is a licensed firm or a firm authorised by the FCA (or any relevant successor body) to conduct insurance distribution activities, the minimum limit of indemnity required for those activities must be in accordance with whatever limits are prescribed by the FCA. This may form part of, or be in addition to, the minimum limit of indemnity required for the firm’s other activities

· If a firm is an accredited legal services firm, the minimum limit of indemnity required for authorised work (i.e., probate and estate administration) is £500,000 for any one claim. This may form part of, or be in addition to, the minimum limit of indemnity required for the firm’s other activities

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 on a professional indemnity insurance limit

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.

Type of Policy Basis?

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’ll have a shortfall.

Any one claim
If 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, for example, you may have been working on high-value contracts that have ended. Be aware that doing this will change 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 in this blog as it depends on both your individual circumstances and regulatory requirements.

Feel free to contact us and we'll be happy to help.

We aim to be the UK Accountancy sector's Broker of choice!