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Professional indemnity insurance (PI) protects individual contractors, freelancers and businesses from claims made against them for breaches of their professional code of conduct. Many professional industries, including the financial and construction sector, have made it compulsory to have a certain level of PI cover but any person or business who makes money by giving their expert opinion and offering a professional service should seriously consider this form of insurance.
If a client sued you for defamation, breach of confidentiality or dishonest conduct and you didn’t have a PI policy, you would be liable to pay damages for any financial or material losses caused to them or their business. Instead of risking your business and personal assets and the reputation you have worked hard to build, taking out adequate professional indemnity insurance can save your business and provide peace of mind in the event of a costly legal battle.
Some of the industries now prioritising professional indemnity insurance include financial advisers, lawyers, tradespeople, marriage celebrants, beauty therapists, engineers, personal trainers and graphic designers. Real life examples of professional indemnity insurance claims:
- An accountant advised their client that an expense was tax-deductible. The ATO investigated the claim and fined the client. The accountant was liable to pay legal fees to defend the claim and pay compensation to the client. Having professional indemnity insurance ensured those costs were covered.
- A building inspector completed a pre-purchase report for a client buying a new house. It was later found that there was significant structural damage in the roof that was not identified in the report. The client sued the building inspector for damages. The building inspector’s expenses were covered by their PI insurance policy.
- An events coordinator double booked a room at a function centre, resulting in the cancellation of one of the events. The client whose event was cancelled made a claim seeking damages for lost business and to recoup expenses. The events coordinator was able to cover these costs because they had a PI policy in place.
Businesses and independent contractors in the market for professional indemnity insurance will need to do their research before choosing a policy. Professionals should be on the look out for insurers who:
- Understand their particular industry and manage policies of other similar businesses
- Can produce evidence or reviews of favourable outcomes for clients when claims are made
- Are approved by the governing body and membership association of your industry
- Have clear policy guidelines regarding inclusions and exclusions and communicate them to you so you know exactly where you stand
- Take a personal approach and assess your business specifically to identify the proposed risks in order to assign adequate cover.
It is important to get a number of quotes and talk to a variety of insurers before committing to any particular policy.
Every professional can find themselves in a situation where a claim is made against them for a breach of professional responsibility. Even if the claims is fatuous, you may still need to go through the legal process of defending yourself against it. When you have professional indemnity insurance, legal fees and compensation are covered so your financial risk is greatly minimised. Businesses and contractors covered with Professional Indemnity insurance are normally protected from clients who claim they have suffered financial loss as the result of one of the following:
- Any negligent act, error or omission deemed a breach of the duty of care, including those that are unintentional
- Defamation or slander of the client
- Breaches of confidentiality or the misuse of the client’s information
- The loss or damage of documents or data belonging to the client
- Infringement of intellectual property including trademarks and copyrights
- Implied Statutory Terms (e.g. Sale of Goods Act 1979, Sale of Goods and Services Act 1982 and other similar legislation as well as Common Law).
Professional Indemnity Insurance cover provides peace of mind to business owners but still requires them to use common sense and be aware of the limits of their policy. Policies differ between each business and industry and should state specific exclusions. You will not be covered if a claim is made as a result of one of these conditions.
The following instances are generally not covered by professional indemnity insurance:
Known claims and circumstances:
- You will not be covered for claims that were made before the time of your current insurance policy or for circumstances you knew could lead to a claim before the policy started. Please be aware of this if you choose to cancel your policy or switch insurers
- Foreign jurisdiction: You will not be covered for claims made outside the insurance company’s jurisdiction
- Insolvency: If a claim is made in relation to your businesses insolvency, bankruptcy or liquidation it is not usually covered by your PI insurance policy.
- Intentional damage: If the damage to the client’s business is done intentionally you will not be covered
- Other General Exemptions: Claims in relation to the removal of asbestos, terrorism or war, or nuclear or radioactive hazards.
Insurers take a lot of factors into consideration when determining premiums for professional indemnity insurance. There is no one-size-fits-all approach for each profession or industry and determining an accurate quote usually requires the client and insurer to work together to create a holistic picture of the business and cover required. When negotiating a competitive premium, the following factors are taken into consideration:
- The client’s claims history. If no claims have been made against a client then a lower premium can be arranged.
- The size of the client’s business in regards to staff members and turnover.
- The industry the client is offering their professional advice and services. Industries like construction carry higher risks and make more claims than other industries and this affects the premium that can be offered to clients.
- The nature of the business that is being conducted and the risks involved in those activities. Even within the same industry, different businesses or independent contractors will have a specific niche or risk associated. A full assessment of your business activities is recommended to ensure the most appropriate cover.
- The amount of excess the client is willing to pay in the event that a claim is made. If a client has access to more funds without compromising their business in the event that a claim is made, a higher excess may enable them to pay a lower premium.
- The statutory requirements for each industry that nominates a minimum PI insurance coverage is usually $1,000,000. The higher the cover you require, the more expensive your premium will be.
- The location of the business. Different states have different stamp duty amounts that affect the premium and particular locations are considered higher risk due to the history of claims made.
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Q: Who is a professional?
- A. A professional includes any person who has undergone specific training in an established discipline to meet an industry standard. A professional offers advice and/or service in their known area of expertise. Examples include IT consultants, physiotherapists, psychologists, nurses, retail managers, marketing execs, designers, consultants of any variety and tradespeople.
Q: Why does a professional need a professional indemnity policy?
- A. As a professional, you are liable to pay for any financial loss suffered by a client as the result of any unintentional breach of professional responsibility. This can end up costing thousands in legal fees and compensation, and jeopardise the business you have worked so hard to build. Professional indemnity insurance protects your livelihood by covering those costs and allowing you to continue on in your business despite any claims made against you.
Q: Do I need professional indemnity insurance?
- A. If you are an independent contractor, consultant or freelancer, you are responsible for your own professional indemnity insurance. In fact, many government bodies and large corporations won’t work with a contractor unless they have their own insurance. You can find out the requirements for PI insurance from your industry’s governing body or talk to a broker. If you are a professional employed by a company, you should be covered by their policy. Ask senior management for a copy of what is and isn’t included in your policy to ensure you are adequately covered should a claim be made against you.
Q: What protection will a professional indemnity policy provide?
- A. A professional indemnity policy will protect you from legal fees and compensation. The exact circumstances and events you are covered for will be laid out explicitly in your policy but generally include claims for breaches in professional duty including negligence, defamation, confidentiality and loss or damage of a client’s documents or data.
Q: How do I apply for professional indemnity insurance?
- A. In order to get a professional indemnity insurance quote you will need to fill out a proposal form disclosing details about your business. You can choose to go through a broker or a trusted insurance company but it is important to get a number of quotes in order to get the best premium, conditions and appropriate coverage before you make a decision.
Businesses and independent contractors who offer expert advice and services should seriously consider taking out a professional indemnity insurance policy to ensure they are protected in the unpredictable event of a claim being made against them. There are many different policies and providers available and it is advised that you shop around before committing to one in particular.Back to top