Professional indemnity insurance explained: who needs it, what it covers and what the regulators require

What professional indemnity insurance actually covers

Professional indemnity insurance protects a business against claims that its advice, design or professional service caused a client financial loss. It responds when a client alleges negligence, errors or omissions in the work delivered, and it typically includes the legal costs of defending the claim, which often exceed the compensation paid.

The core cover is for breach of professional duty arising from negligent acts, errors or omissions in the provision of advice or design services. That extends to breach of confidentiality and unintentional breach of intellectual property rights, where a consultant or firm is accused of using a client's confidential information or infringing a third party's copyright or design without intent.

Legal defence costs are a central part of the cover. Defending a professional negligence claim can take years and involve expert witnesses, solicitors and court fees. The policy pays those costs in addition to any settlement or judgment, up to the limit of indemnity, unless the policy states that costs are included within the limit.

The policy does not cover bodily injury or property damage, which falls under employers' liability and public liability insurance. It also excludes deliberate or dishonest acts, and it will not respond to circumstances that the insured knew about before the policy started but failed to disclose or notify.

Who is legally required to hold it

Several UK regulators make professional indemnity insurance compulsory for their members, with minimum limits set by rule rather than by market choice. The requirements vary by profession, and in some cases by the size or structure of the firm, but the common feature is that practising without the required cover is a regulatory breach.

The Solicitors Regulation Authority requires solicitors to hold cover under its minimum terms and conditions. For unincorporated firms the minimum is £2 million per claim, and for recognised bodies and licensed bodies it is £3 million per claim. The SRA also requires run-off cover for six years after a firm closes.

The ICAEW requires members in practice to hold professional indemnity insurance of at least £1.5 million any one claim, or 2.5 times fee income for smaller firms, subject to a £100,000 floor. ACCA has similar fee-income based formulas for its members in public practice.

RICS sets minimum cover by turnover band, ranging from £250,000 to £1 million per claim. Architects registered with the ARB must hold cover, and the FCA requires insurance intermediaries authorised under the Insurance Distribution Directive to hold minimum cover of EUR 1,300,380 per claim and EUR 1,924,560 in aggregate.

When a client contract requires it

Even where no regulator imposes a minimum, commercial contracts frequently do. Public sector frameworks, corporate supply agreements and agency contracts routinely specify a level of professional indemnity cover that the supplier must maintain for the life of the contract, and often for a period after it ends.

Framework agreements and public sector tenders commonly require professional indemnity cover of £1 million to £5 million per claim, depending on the value and risk profile of the work. A consultant bidding for such work must evidence the cover before appointment, and failure to maintain it during the contract can be a ground for termination.

Umbrella companies and recruitment agencies that place IT contractors typically require the contractor to hold £1 million professional indemnity cover, alongside £5 million employers' liability cover. The requirement is written into the assignment schedule, and the agency will ask for a certificate of insurance before the contractor starts.

The consequences of letting the cover lapse mid-contract are serious. The client may withhold payment, suspend the contractor, or terminate the agreement. If a claim arises during the gap, the contractor has no cover for it, and the breach of contract may itself give the client a separate claim.

How the claims-made basis works

Professional indemnity insurance operates on a claims-made basis. That means the policy that responds is the one in force when the claim is notified, not the one that was in force when the work was done. This is the single most important feature to understand, because it drives the need for continuous cover and run-off protection.

Under a claims-made policy, the insurer on risk at the date of notification pays the claim, provided the work was done after the retroactive date stated in the policy. The retroactive date is usually the date the insured first held continuous cover with that insurer or a predecessor. If the insured switches insurer and the new policy has a later retroactive date, claims arising from earlier work may not be covered.

When a professional retires or closes a firm, the risk of claims does not end. Clients can bring a negligence claim for six years after the work, or longer in some cases. Run-off cover extends the notification period after the business ceases, and the SRA requires six years of run-off cover for solicitors' firms.

Gaps in cover are the most common reason a valid claim is refused. If a policy lapses for even a few days, and a claim is notified after the gap, the new insurer will not cover work done before the gap unless the retroactive date is preserved, which most insurers will not do after a break.

How much cover and how excesses work

The amount of cover is set either by regulatory minimum, by client contract, or by the insured's own assessment of risk. The limit is expressed either as "any one claim" or as an aggregate for the policy year, and the policy may pay costs within the limit or in addition to it.

An "any one claim" limit means the insurer will pay up to that amount for each separate claim, even if several claims arise in the same year. An aggregate limit caps the total payable across all claims in the policy year, so two claims of £800,000 under a £1 million aggregate would exhaust the cover.

Costs inclusive policies pay legal defence costs from within the limit, so a claim that costs £400,000 to defend leaves only £600,000 for compensation. Costs in addition policies pay defence costs on top of the limit, giving the insured the full limit for compensation. The distinction materially changes the effective protection.

The excess, which is the amount the insured pays towards each claim, typically ranges from £250 to £2,500 for small firms. Premiums are driven by turnover, profession, claims history and exposure to US clients, which increases risk because of the US litigation environment. A clean claims history and a low-risk profession attract lower premiums.

If a claim is refused: your route to the Financial Ombudsman

A business that has a professional indemnity claim refused or underpaid can take the dispute to the Financial Ombudsman Service, provided it qualifies as a micro-enterprise. The Ombudsman can look at the policy wording, the insurer's handling of the claim and whether the refusal was justified.

The first step is to complain to the insurer directly. The insurer has eight weeks to respond with a final decision. If it does not resolve the complaint to the policyholder's satisfaction, or if it fails to respond within the eight weeks, the policyholder can refer the case to the Financial Ombudsman Service.

Eligibility for the Ombudsman extends to micro-enterprises, which under the 2019 rules are businesses with an annual turnover of under EUR 2 million and fewer than 10 staff. Sole traders and most small professional firms qualify. Larger businesses cannot use the Ombudsman and would need to pursue a claim through the courts.

When the Ombudsman investigates, it considers the policy wording, whether the insured made full disclosure at inception, whether the claim was notified in time, and whether the insurer applied the correct basis of cover. The Ombudsman can order the insurer to pay the claim, to revise its decision, or to pay compensation for distress and inconvenience.

Is professional indemnity insurance a legal requirement in the UK?

It is a legal requirement for certain regulated professions, including solicitors, accountants in practice, surveyors, architects and FCA-authorised insurance intermediaries. For other professionals it is not a statutory requirement, but client contracts and industry frameworks often make it a condition of engagement.

How much professional indemnity cover does a sole trader need?

The required amount depends on the profession and the client contract. A sole trader solicitor needs £2 million per claim under SRA rules. An ICAEW accountant needs at least £1.5 million or 2.5 times fee income, subject to a £100,000 floor. A sole trader outside a regulated profession should check client contracts, which often specify £1 million.

What is the difference between professional indemnity and public liability?

Professional indemnity covers financial loss caused by negligent advice, errors or omissions in professional work. Public liability covers bodily injury or property damage caused to third parties in the course of business operations. The two covers are separate and respond to different types of claim.

Does professional indemnity insurance cover work done before the policy started?

It covers work done before the policy started only if the work was done after the retroactive date stated in the policy. If the insured had continuous cover with a previous insurer, the new insurer may recognise that continuity and set the retroactive date accordingly. A gap in cover usually moves the retroactive date forward.

Can a small business take a professional indemnity dispute to the Financial Ombudsman?

Yes, if the business qualifies as a micro-enterprise, meaning an annual turnover under EUR 2 million and fewer than 10 staff. The business must first complain to the insurer and allow eight weeks for a response before referring the dispute to the Financial Ombudsman Service.

Frequently asked questions

Is professional indemnity insurance a legal requirement in the UK?

For many professions, yes. Solicitors, accountants, architects, and insurance intermediaries must hold it by law or under their regulator's rules. For example, SRA-regulated firms need at least £2 million or £3 million cover per claim, depending on their status. Other businesses may not be legally required to buy it, but clients often demand it in contracts.

How much professional indemnity cover does a sole trader need?

The amount depends on your profession and regulator. For instance, ICAEW members in practice need at least £1.5 million per claim, or 2.5 times fee income for smaller firms, with a £100,000 minimum. RICS-regulated surveyors need £250,000 to £1 million per claim based on turnover. If unregulated, assess your contract requirements and potential claim size.

What is the difference between professional indemnity and public liability?

Professional indemnity (PI) covers financial loss to clients from professional mistakes, negligence, or breach of duty. Public liability covers third-party bodily injury or property damage caused by your business activities. For example, a PI claim might arise from bad advice, while a public liability claim could result from a client tripping in your office.

Does professional indemnity insurance cover work done before the policy started?

PI policies are usually on a claims-made basis. This means cover applies to claims notified during the policy period, regardless of when the work was done. If you had a policy when the work was performed but it has since lapsed, you may not be covered unless you have run-off cover. Always check your policy terms.

Can a small business take a professional indemnity dispute to the Financial Ombudsman?

Yes, if you are a micro-enterprise with an annual turnover under EUR 2 million and fewer than 10 staff. The Financial Ombudsman Service can consider disputes about PI insurance, including claims handling and policy terms. You must first complain to your insurer and allow them eight weeks to respond before contacting the ombudsman.