Professional Indemnity Insurance

Find out about professional indemnity insurance, how it works and how to compare the best policies on the market in this comprehensive guide.

Last updated on April 20th, 2022 at 04:10 pm by Thomas Perrotta

Professional Indemnity Insurance

Everyone makes mistakes, and that’s no different for businesses. However, what is different is that businesses are held to account in a different way, which can result in having legal action taken against you in more extreme cases. It’s always important to cover yourself when you’re in a situation that is vulnerable to being hit with high costs in this area. Professional indemnity insurance is one way to combat this risk, so you can read more about how it works and the ways you should compare the best policies in this comprehensive guide.

What is professional indemnity insurance and how does it work?

Professional indemnity insurance (or PI insurance) is a type of policy that covers your business against actual or alleged claims made by clients or third parties relating to losses suffered due to your advice or service. In some instances, PI insurance is mandatory by law for Australian businesses, so be wary of your industry’s PI requirements if any.

The primary function of PI insurance is to cover costs associated with legal action being taken against you, which is rarely a minimal expense to pay for. In terms of the specific fees that this insurance will cover you for, you’ll be able to have the following compensated for by your policy:

  • Defence costs
  • Investigation costs
  • Compensation payable
  • Other third-party legal costs

All of these can add up to an incredibly costly process, which may not be able to be afforded otherwise if the business being claimed against is smaller or has a lower turnover of cash. In this respect, PI insurance is a safeguard for businesses that could otherwise run the risk of financial ruin if a substantial claim were made against them.

What is covered by professional indemnity insurance?

There are several incidents can be covered by PI insurance, which can be applicable to a multitude of businesses. Coverage in these areas can save your business a tremendous amount of time and money in the long run. Take a look at some of the most common events that PI insurance can provide coverage for here.

Covered events Examples of how these may occur
Error or omission conducting service

Errors can cover a wide range of incidents that can lead to a professional indemnity claim. This can include mistakes such as a miscalculation of finances or in the process of auditing, causing injury to another person or their property while conducting a service or omitting key details from a document that could draw out the process and cause a third party to be penalised or fail to meet a target deadline.

Breach of duty

Breach of duty is a blanket term that covers a broad range of indiscretions that can lead to claims by third parties. One of the most important of these is a breach of fiduciary duty, meaning the commitment to conduct your service in the best interest of the party that you’re working for. An example of this may be a company director helping a family or friend’s business out financially on their company’s behalf, despite not being in the company’s best interests to do so. Privacy and confidentiality breaches fall under this umbrella also.

Advice leading to financial loss

This one is more straightforward: if you deal in providing professional advice to clients or customers, financial or otherwise, you may be held liable by them if your advice results in a financial loss. This is particularly relevant to businesses who provide financial advice, such as stockbrokers, real estate planners and accountants. Encouraging investments that go awry and advising spending at a poor market price are examples of this.

Advice leading to injury

Similarly, professional advice leading to injury can be grounds for a third party to make a claim against you. This is pertinent to medical professionals above all else, as they are in a select group who are qualified to give you advice in this arena. This could be anything from a doctor asking or permitting you to do something that creates a new injury from a sports health professional giving you the green light to continue playing and exacerbating an existing injury.

Failure to fulfil a contract

This is related to breach of duty but is a common cause for PI insurance claims in its own right. These agreements are legally binding, meaning both parties must sign off on a pre-agreed set of terms and conditions. Therefore, should a business not fulfil the terms set out in their contract, they’re vulnerable to have a claim made against them. This could be for all manner of reasons, such as not complying with a third party’s specifications or not delivering a particular product or service by an agreed date.

How much does professional indemnity insurance cost?

There’s no one fixed cost for each professional indemnity insurance policy. Several factors will influence the price of your premiums and how they change over time, so you should be fully aware of these when entering the process of deciding on the right policy. Here are some of the key areas that your insurer will keep in mind when determining how much your premiums will be worth.

Premium cost factor How it can influence the cost of your policy
Coverage taken out

Not all PI policies are the same in terms of the areas that they’ll cover you for; some will offer coverage in a wider range of areas, while others will focus their coverage into a smaller selection of insured events and contain more exclusions on their policies. You’re likely to find that the greater the number of insured events, the more expensive your premiums will be.

Sum insured

Similarly, the amount of money you stand to be paid out when making a claim will have a major impact on the cost of your premiums. This is because your insurer wants to guarantee that they recoup as much of their money they risk paying on your behalf as possible. You can reduce the cost of your insurance premiums by increasing your excess, which means that you’ll pay more if you make a claim but will save a significant amount on premiums in the long term.

Nature of your business

The size of your business is relevant, as the level of risk increases with the greater number of moving parts. For instance, a family-run business with five employees will pay less for their PI insurance than a large firm operating in multiple locations and with more than 100 employees. Additionally, your industry plays a major role in determining your overall risk, as some will be inherently riskier by nature than others. An example of this may be that a pest inspector failing to spot a termite cluster is likely to be liable to pay less in damages than an architect who strays from a pre-agreed design for a building.

Level of turnover

The success of your business in terms of revenue will also play a role in dictating how much your premiums will cost. In essence, businesses who generate a greater level of revenue are almost guaranteed to pay more for their PI insurance policy than a smaller equivalent business whose turnover is lesser.

History of insurance claims

How your insurance company perceives your likelihood of making a claim will impact the cost of your premiums, and one way to gauge this is by looking at your business’ claims history. The number of claims you’ve made previously will inflate the cost of your premiums, as you’ll be considered as a higher risk than another business that’s never made a claim on their PI insurance.

Explained: the industries that require professional indemnity insurance

Top tips for finding and comparing the best professional indemnity insurance quotes

Utilise Savvy’s comparison tools

Savvy is always a great place to start when looking to compare the best PI insurance policies on the market. Our tools are there to help you analyse how each policy and provider stacks up in all the most important areas to you.

Compare the level of coverage in each policy

As stated earlier, not all policies will cover the same areas. Some will have more exclusions than others, which is a point you’ll have to be acutely aware of when deciding on your PI insurance policy. Always go for the policy that’ll provide the most useful coverage to you.

Consider the cost of premiums that you’ll be paying for

In terms of comparison points, this is one of the more straightforward ones. Always try to find the policy that not only covers you in the areas you need, but also offers you that coverage at an affordable price.

Look into the maximum payout you can receive

Different businesses will have different needs when it comes to the amount that they can be covered for. If your business needs greater protection in that area, you should look to a policy with a higher maximum coverage amount. In most cases, you’ll find PI insurance policies that can stretch up to $10 million worth of coverage.

Common professional indemnity insurance queries

What does professional indemnity insurance not cover?

There are several exclusions that you’ll have to be aware of when it comes to the coverage on your PI insurance policy. This can include the following:

  • Conduct that breaks the law
  • Damage caused that the professional intended to, or was aware could, take place
  • Any matter relating to asbestos
What information do I need when applying for professional indemnity insurance?

There’ll be a number of documents and other pieces of information required to submit your PI insurance application. You’ll have to include:

  • Details about your business relating to what it does, how much it earns and the number of people in its employ
  • Personal identification documents and contact details
  • Any relevant claims history
What’s the difference between professional indemnity insurance and public or product liability insurance?

Public liability insurance relates specifically to injury or damage to property caused to a third party by your business, while product liability insurance refers to these types of damage caused by the product/s that your business produces.

Will I be covered under professional indemnity insurance if I accidentally copy someone else’s work?

Yes – PI insurance covers accidental overstepping of the rights of a third party in relation to intellectual property. For instance, if you unintentionally produce a piece of art that closely resembles that of another artist, any legal action taken against you would be covered by PI insurance.

After I receive a claim from a third party, how do I lodge a professional indemnity insurance claim?

Most insurers will have a document that they provide their customers to fill out when making a claim, so you’ll be able to find that on their website. Send that document alongside any other files to your insurer and they’ll handle the rest.

Should I take out professional indemnity insurance as an individual worker?

If you’re a sole trader, yes – however, if you’re an employee, the responsibility to arrange and maintain a PI insurance policy lies with your employer.