What is Professional Indemnity Insurance?
Advice, Consulting & Design… Do you know what you’re getting in to?
A recent question: "I am thinking of going self employed for a while because I cannot find new employment, can I take out Professional Indemnity Insurance just for a year or 2?"
In short, no. But let me go back in order to come forward so that you understand WHY...
There are 2 main types of Insurance available; Claims Occurring & Claims Made. We are going to focus on the latter because that is how Professional Indemnity (PI) operates; Let us start with the Google definition;
"A Claims Made policy refers to an insurance policy that provides coverage when a claim is made against it, regardless of when the claim event occurred. A claims-made policy is a popular option for when there is a delay between when events occur and when claimants file claims."
Joe is an Architect. Joe has Professional Indemnity Insurance to protect him for the advice & designs he gives/creates. He plans a new building project for his client, a bathroom extension with an antique double ended bath, with gold swan headed taps as the focal point... 2 years later Joe still has his Professional Indemnity Insurance active, it has been continuous for the time he has been trading. His client calls him and explains that the building project, after some to-ing & fro-ing with the council planning departments, is now finally under construction! BUT by following Joe's design, they have found that they are 2 metres short on space to fit in the heirloom golden swan headed bath!?! Thank goodness he had that Professional Indemnity insurance.
In the above example, if Joe had stopped working and cancelled his insurance - there would be no cover. However, if Joe had stopped working but continued to insure the advice/designs that he gave during that period of work; the cover would be available to claim upon!
So, a Claims Made basis covers claims that are made and reported during the policy period only and not once the policy period is over. On lapsing or cancelling a 'claims made' policy, the historic cover paid for will expire.
This basically means that you just have to hold the PI cover as open and active at the time of the claim, for the lifetime of the policy. It doesn’t fix you to one broker or provider, it just needs to be continuous and if you move between providers, be sure to provide the last policy details to the new provider. I like to remind all clients of the ‘claims made’ basis at the sale of each PI policy.
When moving between Insurance Providers with your professional indemnity insurance, it is paramount that you highlight the cover is one that you hold already. The new provider should ask you for a ‘retro active date’; this is the very first date of cover from when you initially took out the policy, not just the date of your last renewal! This retro active date is really important because all changes made will go back to that date;
- If you increase the limit of cover, it will increase from the retro active date
- If you reduce the limit of cover, it will reduce it right back to the retro active date
- If you cancel the policy it will be cancelled back to the retro active date
In addition, Professional Indemnity is sold on a 'Minimum & deposit' basis; insurers calculate an amount for your premium to ensure that the cover will be available for a claim if & when you need it. That means if you cancel your policy half way through the year; there will be no refund.
Well, if you are looking to go Self Employed, well done! But go into this adventure knowingly and consider the time period that you will be working in this way; because if you need Professional Indemnity you could be paying annually or monthly for some 5/7+ years after you have finished being a sole trader. If you have stopped running your own business (or retired etc) you can put the policy into run-off cover, but costs are still attached.
If you have looked at buying Professional Indemnity online, the above still applies. If you have looked at buying the cover direct or from a broker and you have not been told about the above, it will still apply. Professional Indemnity is an Insurance policy based on 'Claims Made' structure - these polices are rarely, if ever sold in any other capacity.
As I always add, Insurance is one of the last industries where you can receive free & professional advice, so go ahead and utilise that if you are thinking about your options.
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