How much professional indemnity cover do you need?

It’s OK saying you need professional indemnity insurance, but you need to work out how much cover you need.

Getting the calculation wrong could be a disaster.

Take out too much cover and you could end up paying for insurance you do not need.

Too little cover could mean that if you make a claim, the settlement could be for too little an amount and leave you out of pocket.

How does the insurer know what to pay?

Professional indemnity (PI) insurers keep a running tally of costs related to a claim and then pay out when the claim is settled – within the limit of indemnity.

This is the figure the PI company is liable to pay according to the terms of the policy.

How do I work out my PI cover?

This depends on you and your business. If you belong to a trade organisation or professional body, that organisation generally suggests a minimum level of cover, but increasing the amount is up to you.

What can affect my level of PI cover?

Lots of factors can impact on your PI level of cover – and here’s a few you might want to consider:

  • Inflation – Some consumers do not review their level of cover for years and the costs of settling a claim can rise steadily over the years. Always factor in the rising cost of living to make sure the cover is high enough.

Similarly, some claims can take a long time to settle and inflation could affect the final settlement, but the pay-out is set to the limit in force when the claim started.

  • Claimant’s costs – A simple error is too work out your own costs in event of a claim but to forget those of the claimant that can add a significant amount to any compensation
  • Statutory interest – Like claimant’s costs, a court will add interest to any settlement
  • Think before reducing cover – Maybe your business had a big project and needed a higher level of cover in the past, but now the project has ended you want to save money by reducing cover. If you do, you may not have enough cover if a claim comes in from a past year

Specialist cover to suit your needs

Discuss the level of PI cover you may need with an adviser, but you know your business and the risks you could face.

How to cost PI insurance

First, forget the price and look at the risk.

Ask the insurer to give you a quote for a policy that includes a reasonable level of cover and all the bells and whistles you believe you might need.

Once you have that quote, look at the extras to decide if you really need them.

After a few crossings out, you will arrive at a level of cover that suits the risks you face – and that’s the policy you should pay for.

The starting points are generally £250,000 for sole traders, £500,000 for partnerships and £1 million for a company.

Premiums start from £12.60* a month

*Based on £100,000 worth of cover. Plus insurance premium tax (IPT) currently at 12%.