A guide to professional indemnity insurance for freelancers and the self-employed

There are many types of business insurance. From public liability to employer's liability and cyber insurance. All of them are designed to give you the peace of mind that, should the worst happen, you'll be protected.

But it can be tricky to work out what insurance policies are right for your business. This guide will help you decide if professional indemnity insurance is for you, and if it is, the level of cover you should consider taking out.

What is professional indemnity insurance?

Professional indemnity insurance protects you if a client makes a claim against your business, because they believe your work has harmed their company or caused them a financial loss. Also known as professional liability insurance, it will typically cover the costs of correcting the mistakes if you're found liable, settling the claim, and any legal fees you face.

For example, if you were an IT consultant and recommended a solution that lost all your client's data for several days. Or if you were an accountant and forgot to submit a client's accounts to HMRC and they got fined. Below is a more in-depth look at what it covers you against.

What does professional indemnity insurance protect you against?

Professional indemnity cover will vary between insurers. So always check what's included with your policy. And remember, just because a quote is cheap, doesn't mean it's the best value and protection.

Here are some of the things professional indemnity insurance should cover you for:

  • Confidentiality breach. If you accidentally disclose information or data to a third party, without your client's consent. Such breaches cause the UK to lose millions in damages.
    Examples include:
    • Stolen laptops containing sensitive information.
    • Sending an email with important business decisions to multiple people by mistake.
    • Emailing important ID documents to the wrong department.
  • Irresponsible employees. If you have an employee, or former one, that impacts your client's business by lying, stealing or behaving in a dishonest, fraudulent or malicious way.
  • Professional negligence. If you fail to live up to your duty of care, such as giving bad advice, and it costs your client time and money. These could include things like:
    • An accountant not informing a client about their tax relief options.
    • A financial advisor recommending an unsuitable mortgage product.
    • A building surveyor missing structural problems with a property.
    • A solicitor making errors when preparing a will.
  • Defamation. If you use or produce written or spoken statements or materials that damage a client's reputation. People often relate 'defamation cases' to celebrities. Yet in 2017, only 6% of cases were from celebrities. This is believed to be due to the changes to the Defamation Act 2013. They raised the threshold from 'substantial' to 'serious harm', which requires the claimant to prove 'serious financial loss' to support any claim. And while the number of defamation cases brought against businesses has fallen, the risk always remains.
  • Infringement of intellectual property rights. If you unintentionally violate intellectual property, copyrights or trademarks.
  • Loss of, or damage to, documents. If you sent documents that got lost in the post or if they are stolen in your care.
  • Legal costs. If you have a claim made against you, it covers your legal costs for defending yourself in court.

What professions should consider professional indemnity insurance?

If you offer advice or professional services to a client, it's important to consider taking out professional indemnity insurance. It doesn't matter how experienced you are, we all make mistakes. Accidently sending confidential information to the wrong email address. Or creating outdoor advertising posters that need replacing due to a tiny typo.

Depending on your profession, some insurance companies might not cover you. This could be for a number of reasons. For example, following the Grenfell Tower fire, several insurers stopped providing professional indemnity cover to the construction industry, or drastically increased their premiums.

Below are just a few of the professions that could benefit from having professional indemnity insurance.

HR consultants

By offering advice on dealing with employee and company issues, a claim could be made against you. Karneet Chowdhury, Office & Professionals Business Manager at Direct Line commented: "Professional indemnity insurance is of vital importance for HR consultants. If a client believed the consultant's advice had been negligent and led to a financial loss or harmed their reputation, or if they had taken advice which they felt resulted in someone being unjustly dismissed, then they could claim for compensation. Professional indemnity insurance is designed to deal with the cost of this risk."

It's not only HR consultants that should consider taking out professional indemnity insurance. Potentially all consultants should. From IT consultants and PR consultants, to business and management consultants.

As a consultant you can hugely impact and help your clients, which can be hugely rewarding. But there's often a lot of responsibility and little margin for error. If a client believes you haven't delivered the desired result, and you've damaged their business, they could make a claim against you.

Accountants

If you're an Accountant, the likelihood is you already have professional indemnity insurance (PII). Having a minimum level is compulsory to be a member of the Association of Charted Certified Accountants (ACCA), the Institute of Chartered Accountants in England and Wales (ICAEW), and the Chartered Institute of Management Accountants (CIMA).

However, some accountants are unaware of the risks they are facing. There have been multiple cases against accountants where they have provided tax advice to clients that HMRC deemed evasive and fraudulent. The penalties for which can be tens of thousands of pounds. Understandably, if they did this deliberately to minimise a client's tax bill, their professional indemnity insurance wouldn't cover them. But if it was shown to be a genuine mistake, they would be protected.

Another area that sees many claims against accountants is breach of confidentiality for bookkeeping and payroll. Such as accidently sending incorrect pay details to the wrong recipient.

No matter how rigorously you check things, mistakes happen. We're all human. To help keep your business safe, you could consider a PII policy that meets the requirements of the ACCA and the ICAEW, as well as the Institute of Certified Bookkeepers (ICB) and the International Association of Bookkeepers (ICAB).

Surveyors

To be a member of the Royal Institute of Chartered Surveyors (RICS), you must have professional indemnity insurance. How much cover the RICS requires you to have depends on your business's turnover.

Firm's turnover in the preceding year Minimum limit of indemnity
£100,000 or less £250,000
£100,001 to £200,000 £500,000
£200,001 and above £1,000,000

As a RICS member, you're also required to take out 'run-off cover'. The RICS states the reason for this is: "To ensure that firms, members and their clients are not exposed to financial detriment in the period following a firm ceasing to trade…". You can find out more about 'protecting yourself after your professional indemnity policy expires' later in this guide.

Estate and letting agents

Building a successful estate agency can be challenging. Especially as the property market is continually fluctuating.

Your clients rely on your expertise and sound knowledge of the industry to guide them. But providing helpful recommendations can also have legal implications. To keep your estate agency business safe, professional indemnity insurance could give you the reassurance you're looking for.

If you're a member of one of the following estate and letting agent professional bodies, it's important you select a policy that meets their requirements:

Web designers

If you're a talented and experienced web designer, most of your projects will finish on time and on budget. Creating happy clients, a paid invoice and potentially an introduction to another client.

Unfortunately, there are occasions when this isn't the case. And while most things can be sorted out amicably, there could be a situation when a client escalates it and makes a claim against you. For example, if they believe your website design has resulted in them making a financial loss. Should something like this ever happen, having a tailored web designer professional indemnity insurance policy could be hugely important to your business.

Do you legally need professional indemnity insurance?

You aren't legally required to have professional indemnity insurance. However, apart from the peace of mind it can provide you, there are other occasions when you will need it.

Firstly, to join certain professional associations. These include the Institute of Chartered Accountants in England and Wales (ICAEW), the Royal Institute of British Architects (RIBA), and many more.

Secondly, when tendering for new client contracts. One of the conditions might be you must have professional indemnity insurance. This is often the case for local authorities. So, not only could it protect your business, it could help you win new business too.

Professional indemnity insurance for freelancers and the self-employed.

What freelancers need to know about professional indemnity insurance

Freelancers work across many industries and are vital to the UK economy, currently contributing approximately £125 billion. Research by Micro Biz Mag shows the types of freelance skills most in demand in the UK over the last year (2019).

The freelance skills that received the highest volume of searches over the last year.

Search term Average number of monthly searches (UK)
Freelance Graphic Designer 2,400
Freelance Web Designer 2,000
Freelance Web Developer 1,700
Freelance Writing 1,700
Freelance Photographer 1,500
Freelance Copywriter 1,400
Freelance Designer 1000
Freelance Accountant 870
Freelance SEO 700
Freelance Marketing 660
Freelance Translator 520
Freelance Social Media Manager 470
PPC Consultant 390
PPC Freelancer 270
Freelance SEO Consultant 260
Freelance SEO Expert 250

Whether your profession is included in the above table or not, if you're a freelancer providing professional services to your clients, just like many other businesses, you're at risk of a negligence claim against you.

Freelance UK describe professional indemnity insurance as: "One of the most important types of insurance that freelancers and the self-employed will need." Why is this? Unfortunately, just because you work for yourself and have no employees, doesn't make you exempt from a claim. You might even be more vulnerable as clients assume because you're so small, you won't be able to fight back.

A common concern for freelancers is that professional indemnity insurance is expensive. Fortunately it's not. It could cost you less than £7 per month. Potentially a small price to pay to keep you working.

Another advantage of professional indemnity insurance for freelancers is the emotional support you'll receive, should a claim against you be made. Understandably, dealing with a threatening or unhappy client is always difficult. But if you're alone, it can feel extra daunting. Having expert guidance and support can help ease the pressure on you.

What you need to know about professional indemnity insurance if you're self-employed

The number of self-employed people in the UK has risen over the last two decades. According to the Office for National Statistics, it increased from 3.3 million people (12.0% of the labour force) in 2001 to 4.8 million (15.1% of the labour force) in 2017.

The rise in the number of self-employed people has been evident across every region of the UK between 2001 and 2016. With the South, in particular London, seeing the greatest increase.

Self-employment as a percent of labour force participation by region.

Bar chart

Source: Office for National Statistics, Labour Force Survey.

There are many benefits of self-employment. More control. Greater flexibility. The opportunity to earn money doing something you love. But there are disadvantages too. No guaranteed regular income. And the risk a client could make a legal claim against you.

If you are self-employed, as with freelancers, this professional indemnity insurance guide will give you a good idea about what you need to know. Depending on what you do, and the type of cover you're looking for, your insurer should be able to tailor a quote to meet your needs.

How much professional indemnity cover do you need?

Cover can range from hundreds of thousands to millions of pounds. How much you need will depend on your profession and factors such as:

  • Client/project size. If your clients are pretty big, the money involved and the potentially losses tend to be larger, so your cover should reflect this.
  • Client cover requirements. Some clients will insist on a minimum level of cover to work for them. Double-check this first before taking out cover, although you could always increase the cover amount later.

Protecting yourself after your professional indemnity policy expires.

With professional indemnity insurance, you're only normally covered against claims during the term of your policy. Even if the incident happened when your policy was in place, if the claim is made after it has expired, you won't be covered. This is called a 'claims-made basis'. It's something you should check when taking out your cover.

So what happens if you retire? Change professions? Or sell the business? Fortunately, you can continue protecting yourself. The obvious way is to keep renewing your policy. Another solution is to take out 'run-off cover'. This will protect you from any new claims made, after your professional indemnity insurance expires.

But how long do you need run-off cover for? The Association of British Insurers (ABI) states: "New claims can be brought against you for up to six years after an alleged negligent act occurred, so your run-off policy should cover you for this period."

If you change insurer, a run-off policy will also protect you for new claims that happened when you were with the previous insurer. Although, your new insurer might cover you for claims relating to prior incidents, providing you can prove you had professional indemnity insurance in place when they occurred.

What's the difference between professional indemnity insurance and public liability insurance?

These two insurance types are often mixed up. But cover you for different things.

Public liability helps protect you against claims relating to injury, illness or property damage. For example, you accidently spill your cappuccino over a client's laptop. Or somebody injures themselves after slipping on a wet floor on your business premises.

Professional indemnity insurance covers you if a client claims your advice, work, ideas or designs resulted in them losing money or business. For example, your client makes a financial loss as a result of your advice.

You can learn more about professional indemnity insurance at Direct Line here.

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Added: 16 Sep 2020