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What is professional indemnity insurance?

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Last editedJun 20212 min read

Every business tries to do it best, but sometimes things go wrong or a customer makes an accusation against you. From our indemnity insurance definition to precisely why you need it, here’s our guide on this important form of business cover.

Professional indemnity insurance definition

Professional indemnity insurance, also known as PI or PII, is a type of insurance designed to protect a business should a customer make a claim against it. For example, if a customer accuses a business of negligence, leading to the company having to undertake legal proceedings, indemnity insurance covers the fees.

How does indemnity work?

Indemnity is built into many insurance policies. Often, adding an indemnity clause to insurance can cause higher premiums as it implies increased risk. This risk includes things like damage, which would be covered by indemnity insurance, meaning insurance pays for repairs, not the customer. In return for this cover for unforeseen setbacks, the customer pays their insurance premiums, calculated according to their level of risk.

What does professional indemnity insurance cover?

Indemnity insurance can help protect companies and the talent they hire from issues which can require financial repair, such as malpractice claims or lawsuits concerning professional negligence. This could include:

  • Confidentiality breaches

  • Loss of money or goods

  • Loss of data or documents

Indemnity insurance is also important if you work with temporary staff or contractors. Even if these individuals are not part of your brand usually, they can still be the cause of customers making claims of negligence, and you need to be covered for that. Failing to consider temporary staff could land you with huge legal fees.

An indemnity insurance policy plan is a “claims made” type of insurance, meaning it will cover a claim at the point it is made, regardless of when the actual date of the event the claim is based on. Endorsements can be added to an indemnity insurance plan which extends coverage to events occurring while the policy was in place, even if it has lapsed. 

Do I need professional indemnity insurance?

Most businesses should look into indemnity insurance purely for peace of mind. If you provide a service, handle client data, or deal with intellectual property (such as design), it is useful to have this protection in place. It is often the case that professional bodies require members to hold this type of insurance, such as accountants. You may also find that having this sort of insurance is required by your clients, who may not wish to work with you if you do not have adequate cover in place. Businesses should make getting a professional indemnity insurance plan a priority if they do any of the following:

  • You provide professional service and expert advice

  • You deal with intellectual property or projects that can concern issues of copyright

  • You have a hands-on job such as beauty that can lead to accidents in the workplace

  • You have access to confidential data

  • You use work in a sector that uses tools that could breach contractual agreements, e.g., a diagnostic computer program that accidentally scans confidential files when running

This is also true even if you are a sole proprietorship, as you may still deal with these sensitive cases.

Is professional indemnity insurance tax deductible?

Yes, professional indemnity insurance plans count as business expenses, so the premiums you pay toward it are tax deductible.

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