Businesses of all sizes must take steps to safeguard themselves against potential claims arising from professional negligence. But for smaller companies with limited resources, this becomes even more crucial.
Just one claim of negligence filed against a small business could at best, scar its reputation, and at worst, drain its resources and threaten its very existence.
Professional Indemnity (PI) insurance offers companies a safety net in the event that they are alleged to have provided substandard service or advice. It will help them to cover legal costs and expenses related to defending the claim and, if necessary, pay compensation to the claimant in order to rectify the issue.
There are many possible scenarios in which a claim could be brought against a company, from loss of documents, data or goods, to defamation and libel and professional negligence.
Who needs it?
Essentially, PI insurance is suited to any professional who provides specialist consultancy or advice. This encompasses a wide range of industries and roles, which could include…
- Tax agents
- IT workers
If your client is still unsure as to whether or not they would benefit from PI insurance, ask them if any of the questions below apply to them…
Do you provide advice and/or consultancy?
Claims can arise from mistakes in advice.
Do you handle people’s information?
Accidentally disclosing a customer’s personal data could result in a lawsuit.
Has a customer insisted you have PI in place?
Some businesses will only work with clients who do.
Do you provide an expert service?
In case there are errors in plans, calculations or designs.
Does an industry body require you to have up-to-date PI insurance?
Professional Indemnity is a requirement for some professional bodies.
As a broker, it’s important your clients are aware of the importance of PI insurance in their sector. The cost of having to defend a claim made against them is likely to put both their company and personal assets at risk.
How much cover do they need?
The level of PI coverage a client has and needs depends on their industry and the type of service they provide. To calculate the level of cover, you need to build an accurate picture of how much risk your client is exposed to. Here are some tips:
The first thing to do is evaluate the nature of your client’s work – what do they do and what could go wrong? Consider the worst-case scenario and how much a claim in this instance would cost to put right.
Remember that cover needs to include total rectification costs plus the legal costs of a claim being made against your client. If they have cover for £200,000 but the total bill to rectify the mistake, compensate the claimant and pay legal fees amounts to £250,000, they’ll be expected to cover that shortfall.
Consider the client’s contracts
What types of companies does the client carry out work for? Are they small businesses, or are they large corporations? This is an important factor to consider, as big companies – the majority of which have their own legal departments – won’t think twice about suing if they think it necessary.
If your client works for a number of large businesses, they must protect themselves with a policy that covers all legal defence costs in the event of a lawsuit.
Calculate contract values
What is your client’s average and largest fees they charge customers for their service? While having these figures in mind will set a good benchmark, it doesn’t mean that insurance should be set at this amount, as businesses are likely to sue for more. This is especially the case if a business’ revenue takes a hit as a result of your client’s alleged negligence.
If your client’s work forms part of a larger project for a business, that business can sue for total loss if your client makes a mistake and it leads to disruption or delays. In industries such as construction, this can amount to hundreds of thousands of pounds.
Ensure legal cover is sufficient
Whether or not a claim filed against your client is successful, they will still be expected to cover the legal costs associated with the defence. And if the claim is drawn out or is complicated, the solicitor’s bill could run into the high thousands.
The claim may end up being denied, but your client will still need to pay for someone to argue their case for them.
As an insurance broker, robustly assessing the nature of your client’s work will help to ensure you provide them with an adequate level of cover. Having a quality PI insurance policy in place will give them peace of mind that their assets will be well-protected should they find themselves facing a lawsuit in future.
At Tokio Marine HCC, we write an extensive range of professions and produce specialist PI solutions for all types of risks to brokers and their clients. Our financial strength – AA- by Standard & Poor’s – combined with our wealth of underwriting experience, enables us to set the standard for underwriting service in the UK. Get in touch to find out more.