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What is professional indemnity insurance - and why do you need it?

Many firms operating in the financial services sector are required by the FCA to hold appropriate professional indemnity insurance (PI) and few businesses in sectors such as investments, payment services or credit should consider operating without the protection that PI cover provides.

If you’re running a regulated business in the financial services sector, a professional indemnity policy can protect your firm from the potentially huge cost of claims made by customers alleging failure in the performance of your professional duties or a breach in your duty of care.

PI insurance can also provide financial services firms with protection against claims for other professional failings such as dishonesty, loss of customer documents or data, defamation, or infringement of intellectual property rights.

It may be tempting to assume that none of these issues could ever affect your business. However, simple human error can leave even the best-run firm facing potentially ruinous costs and even if you’ve done nothing wrong, the costs of defending a baseless claim can be a major drain on your firm’s finances.

That’s where PI insurance comes in. Not all professional indemnity policies are alike and it’s important to select one that provides the precise scope of cover your firm needs - and that offers good value for money. Buying on price alone can be a risky strategy and it’s easy to pay more than you need to for a PI policy that isn’t tailored to the nature and activities of your business.

PI insurance isn’t cheap. Insurers are well aware that claims can and do happen - and that they can end up costing a lot of money. They price their product according to the insured’s risk factors and many insure many different types of firms with many different risk profiles. We can highlight the key rating factors that will give insurers more comfort in covering the risk of our client’s business.

A specialist professional indemnity insurer can offer a wide range of coverage at a cost far less than that of a potential claim and most experienced financial services firms should consider PI to be an integral part of their risk management strategy.

A typical PI policy will cover your legal defence costs if someone makes a claim against your firm. If you win the case, that’s the end of the story. If not, your professional indemnity insurance policy can cover some or all of any damages awarded against you - depending on the level of cover you’ve taken out.

Your PI policy can also cover the costs involved in putting right problems your actions or inaction may have brought about. This could include the costs you could incur, for example, as a result of losing client documents entrusted to your care or covering against dishonest actions by employees.

It’s important to work out what cover you need and what you are prepared to pay for it. If a firm assesses its estimated maximum loss (EML) as well as its largest and average contract/project sizes, this can help it make a decision as to what limit would be best suited to its business.