Professional Indemnity Explained

Professional indemnity (PI) insurance protects businesses that give advice, provide professional services, or deliver designs and specifications. It covers claims alleging negligence, errors, omissions, or breach of professional duty.

PI is common for consultants, designers, IT services, accountants, and many professional and technical trades. This guide explains how PI works and what to check.

What Professional Indemnity Insurance Actually Covers

Professional Indemnity (PI) insurance protects businesses and professionals against claims arising from errors, omissions, negligence, or breach of professional duty in the services they provide.

Unlike public liability, which responds to physical injury or property damage, PI addresses financial loss caused by professional advice, design, or services. Typical insured allegations include:

• Professional negligence
• Breach of contract
• Misrepresentation
• Defamation (in some policies)
• Loss of documents
• Intellectual property infringement (sometimes limited)

PI is common for:

• Consultants
• Accountants
• Architects
• Engineers
• IT contractors
• Surveyors
• Marketing agencies
• Financial professionals

The defining feature of PI is that it covers financial loss rather than physical damage.

Claims-Made Basis — The Critical Concept

Professional indemnity operates on a “claims-made” basis. This is fundamentally different from occurrence-based policies such as public liability. A claims-made policy responds if:

• The claim is made during the policy period, AND
• The work giving rise to the claim occurred after the retroactive date

This means:

The date of the claim matters more than the date of the work.

If you cancel your PI policy and a claim arises later from historic work, you may not be covered unless you maintain cover or purchase run-off insurance.

Retroactive Date — Why It Matters

The retroactive date defines how far back your work is covered.

For example:

Retroactive date: 1 January 2021. Policy period: 2025.

If a claim in 2025 relates to work done in 2020, it may not be covered.

Maintaining a continuous retroactive date is critical when switching insurers. Resetting this date creates a dangerous gap in protection.

Duty of Fair Presentation (Insurance Act 2015)

For businesses, PI policies fall under the Insurance Act 2015.

You must make a “fair presentation of risk” by disclosing:

• Material circumstances
• Claims history
• Known circumstances that may give rise to claims
• Significant business changes

Failure to disclose properly can allow insurers to:

• Reduce claim payments proportionately
• Apply different terms
• Void the policy in cases of deliberate non-disclosure

Notification Obligations — A Common Coverage Trap

PI policies require prompt notification of:

• Claims
• Circumstances that may give rise to a claim

If you become aware of a potential issue and fail to notify it before policy expiry, a later claim may not be covered.

For example:

A client complains of design flaws but has not issued a formal claim. If you ignore this and do not notify, the eventual formal claim could fall outside coverage. Late notification is one of the most common reasons for coverage disputes.

Defence Costs — Inside or Outside the Limit?

PI policies often include defence costs within the indemnity limit.

Example:

Limit of indemnity: £1,000,000 Legal defence costs: £400,000 Settlement: £700,000

If defence costs are inside the limit, total claim exceeds policy limit.

This can leave the insured funding part of the settlement personally.

Understanding whether defence costs erode the limit is critical.

Aggregation Clauses

Aggregation determines whether multiple related claims count as:

• One claim (one excess, one limit)

OR

• Multiple separate claims

Broad aggregation clauses can reduce the effective protection available.

For professionals handling large projects, aggregation wording is a major underwriting factor.

Run-Off Cover

If a business:

• Closes
• Merges
• Retires
• Changes structure

Historic work still carries liability risk.

Run-off cover maintains protection for claims made after trading stops.

Many professional bodies require 6 years of run-off cover due to contractual limitation periods.

Real-World Claim Flow Example

Scenario:

An architect designs a residential development. A structural defect emerges 3 years later.

Claim process:

• Client notifies architect
• Architect notifies insurer
• Insurer appoints panel solicitors
• Liability assessed
• Experts instructed
• Settlement negotiated or defended

Legal costs often represent a significant portion of total claim cost.

Common Misconceptions

Professional indemnity does not:

• Cover deliberate wrongdoing
• Automatically cover subcontractors
• Cover work outside declared business description
• Protect against criminal penalties

Policy wording matters significantly.

When Is PI Compulsory?

Certain professions require mandatory PI, including:

• Solicitors (regulated by SRA)
• Accountants (depending on body)
• Architects
• Financial advisers

Contractual requirements often impose minimum indemnity limits.

Key takeaways

• PI covers claims about professional mistakes and financial loss, not physical injury/property damage.
• It is often claims-made — continuous cover and prompt notification are essential.
• Retroactive dates and run-off cover protect you for past work.
• Watch contractual liability and ‘known circumstances’ exclusions.
• Compare limits and whether defence costs sit inside or outside the limit.