Professional Indemnity Insurance for Consultants

Information verified correct on October 22nd, 2016

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Professional indemnity insurance is a form of insurance that protects a policyholder in cases where they are sued for negligence. Indemnity insurance is an important investment for professionals who, as part of their business, provide services or advice to their customers. The term ‘professional indemnity insurance’ may be known differently within each profession or country, but it essentially refers to an insurance policy that is more specific than general liability insurance and that is focussed on covering the loss, damages and/or legal fees that arise in situations where a customer or client sues a professional in regard to their provided service or advice.

Holding a policy of professional indemnity insurance is therefore important for professionals who want to minimise the costs associated with being sued in a negligence case. Legal costs of defending a claim can be very expensive and damages awarded to a successful plaintiff can be costly. Professional indemnity insurance helps to cover the above costs, allowing a professional to focus on running their business without the stresses of worrying about potential litigation costs.

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Who can benefit from professional indemnity insurance?

Professional indemnity insurance is not necessary for many professions, however, individuals in certain industries should definitely consider holding it. Historically, mostly those in the medical, legal and accounting fields have held this form of insurance. However, even if this sort of cover isn’t mandatory, it can still provide much needed financial protection for a range of professions. These include:

  • Management consultants
  • IT professionals
  • Personal trainers and fitness coaches
  • Public relations consultants
  • Media advisers
  • Financial advisers
  • Accountants
  • Solicitors
  • Architects
  • Surveyors
  • Real estate agents
  • Doctors and nurses
  • Engineers.

For example, other professions that should consider holding indemnity insurance include consultants, advertising agents, contractors, real estate agents, veterinarians and travel agents. Further examples would include any profession that, as a result of negligently providing advice or a service, could potentially cause significant harm to a client or customer.

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Why do Consultants Need Professional Indemnity Insurance Cover?

On the face of it, indemnity insurance seems to be only useful for contractors facing a negligence claim. In reality, there are a number of good reasons to carry this type of insurance.

The main reason why consultants should hold indemnity insurance is that they are covered in case they are sued by one of their clients for being negligent during their offer of advice or supplying a service. A consultant is a professional and the client will rely on their advice because of this. If the client relies upon a consultant’s advice and suffers a loss as a result, they may have the right to bring a case of negligence to the consultant. Having indemnity insurance will cover the costs that arise in this situation, which can be substantial and it is therefore important for any consultant to possess adequate coverage.

Even the most thorough and professional consultants should have an insurance policy. A client may suffer a loss by incorrectly following a consultant’s advice, or by not being aware of all of the relevant facts. Consultants may have to defend themselves at any time, even if they fulfil their duty to the client to the highest degree. This is a key point: there are upfront legal costs associated with defending a claim, even for consultants who are ‘in the right’. A good indemnity insurance policy will cover these costs. You never know when a vexatious lawyer or client may sue you!

Many policies will also cover a consultant’s costs in areas other than negligence. For example, some providers will cover a consultant who breaches their confidentiality duties or infringes intellectual property rights.

Another thing to consider is that, depending on which field a consultant works in, they may have a statutory obligation to hold indemnity insurance. In such cases, it may be illegal to offer advice without being covered.

Finally, a consultant should take out professional indemnity insurance because it might help them to secure more clients. For example, in certain fields, government bodies in Australia will only work with consultants who carry adequate coverage.

Therefore, it’s important that contractors hold professional indemnity insurance for a variety of reasons.

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What Events may Lead to a Claim Being Made Against a Consultant?

A claim made by a client of a consultant involves a written or verbal notice or an originating legal process that demands the consultant to compensate the client for a loss suffered as a result of engaging their services. Claims against a consultant may arise for a number of reasons, which can depend on the type of consulting work in question. Generally, because the roles of most consultants involve giving advice, the most important area in which a claim may arise is through a client relying on the advice of a consultant, which leads the client to experience a loss. Clients rely on the fact that the consultant is a professional and trust their advice. It’s because of this that consultants have a duty to provide correct and full advice and that clients are able to recover any losses as a result. For example, a consultant who has been hired to provide financial advice to a company may have a claim served on them if their advice is incorrect and causes the company to suffer a financial loss.

There are a wide range of circumstances that could lead to a claim being made against you. They include but are not limited to:

      • If you breach your client’s confidentiality
      • If you misplace important documents that belong to a client
      • If a client issues you with instructions and you fail to follow them
      • If you are accused of defamation, slander or libel
      • If you offer advice to a client which is either incorrect or not substantial enough
      • If you breach Fair Trading legislation.

Outside of an advice-giving context, claims may also arise in situations where the consultant is providing a service. For example, a recruitment consultant hiring an ill-suited employee for a role in a company without conducting a background check could trigger a claim by the company. Other instances in which a claim may arise against a consultant include those where a consultant breaches a client’s confidentiality, engages in misrepresentation, infringes intellectual property rights, or who causes their client to suffer a loss in another way.

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What are the Common Features of Professional Indemnity Insurance?

Indemnity insurance policies vary, however there are a few common features that most should contain. The majority of policies will include coverage of costs associated with defending a negligence claim against a client. These costs will mainly be those needed to retain a lawyer, other legal costs associated with defending a claim and the amount needed to compensate a client if their claim is successful.

Aside from negligence, professional indemnity insurance can also cover the costs associated with:

      • infringing intellectual property rights
      • losing or damaging documents
      • hiring public relation consultants to restore a professional’s reputation.

Some providers will also provide the holder with a limited amount of free legal consultation and coverage for employees, contractors and spouses of the policyholder.

In terms of features of an indemnity insurance policy, like with other types of insurance, each should possess a period of insurance in which the holder can make a claim. Some providers also offer retroactive policies, which may cover claims made in relation to actions that occurred prior to the period of insurance. Providers may also offer ‘run off’ cover, which allows the holder to bring a claim after selling their business for matters that occurred before they made the sale.

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Choosing Business Insurance for Consultants

There are a few things you need to consider as a consultant before purchasing a policy. These will principally depend on the industry that you work in and your own preferences. Ideally you should choose one that fits your budget and provides the right coverage for your line of work.

Firstly, you should consider the statutory requirements of your profession – it’s possible that the law outlines which level of coverage you must hold in your line of work. Secondly, contemplate the industry that you work in. You obviously need more coverage if you work in an industry where legal disputes are common. Similarly, if your role as a consultant involves decision-making that exposes your client to a large amount of loss, an appropriate amount of coverage will offset your sizeable risk. Also, the nature of your work should inform you as to whether you need to be covered for breaches outside of negligence, such as the infringement of intellectual property rights. Thirdly, consider whether you need a policy that covers your employees and others who work alongside you. Finally, think about the time span that you need to cover. Do you need retroactive cover? Should you consider a term that extends after you retire?

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Frequently Asked Questions About Professional Indemnity Insurance

Q. What is a professional?

  • A. A professional is anyone who uses advanced knowledge to advise a client or provide services to them. It is a broad definition that does not necessarily relate only to doctors, lawyers, and accountants. For example, different types of consultants, agents, and managers may fall under this definition.

Q. What is negligence?

  • A. Negligence, in this context, involves a situation where the below circumstances are met:
  • A professional, such as a consultant, owes a duty of care to a client;
  • The consultant does not meet this standard of care i.e. they breach their duty to the client;
  • The client suffers a loss that a consultant should have foreseen; and
  • The above loss was caused by the consultant not fulfilling their duty to the client.

Q. What will professional indemnity insurance provide cover for?

  • A. Depending upon the specific policy, this type of insurance chiefly covers the legal costs of a professional in a negligence case, and any amount they will have to pay as a result of the case.

Q. Why should a professional hold indemnity insurance?

  • A. Professionals need to advise and service their clients to the degree expected of their profession. If the professional is unable to do this, through a mistake, incompetence, or otherwise, indemnity insurance will enable them to cover the costs in the event that they are sued.

Q. But I am very confident in my professional abilities! Why should I have indemnity insurance?

  • A. In today’s legal climate, it is possible that vexatious litigants may sue you even if you have done nothing wrong. Just defending yourself, even if you are ‘in the right’, can cost you tens of thousands of dollars. Indemnity insurance can cover these costs for you and give you the peace of mind just in case you are unfortunate enough to have to defend yourself in a legal context.

Q. Can a new insurance policy be purchased to cover past actions that led to a dispute?

  • A. This will depend upon the specific policy and provider. Retroactive cover may indemnify a professional for past actions prior to the period of insurance in some instances. However, this usually applies to wrongs that the policyholder has no prior knowledge of.
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Find Professional Indemnity Insurance for a Consultant

Because consultants are often engaged to help make important decisions for companies, it is wise for them to hold a policy of professional indemnity insurance in case they cause a client to suffer a loss. There are many providers available and the correct policy to choose depends on the nature of the consultant’s work.

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William Eve

Will is a personal finance writer for specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

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