Professional Indemnity Insurance UK: Who Needs It and FCA Regulation

What professional indemnity insurance actually covers

Professional indemnity insurance protects a business against claims that its professional services caused a client to suffer financial loss. The trigger is usually an allegation of negligence, error or omission: a piece of advice that turned out to be wrong, a design that failed, a report that missed something material, or a service that fell short of the standard the client was entitled to expect. The policy pays the legal costs of defending the allegation and any damages or settlement that results.

Crucially, PI responds to financial harm rather than physical harm. If a consultant's flawed recommendation costs a client a profitable contract, that is a PI matter. If a visitor trips in the consultant's office and breaks an ankle, that is a public liability matter. Keeping the two apart is the single most common point of confusion, because many advice-led firms assume one product covers both situations.

Most modern PI policies also extend beyond pure negligence. Cover commonly includes defamation, breach of confidentiality, infringement of intellectual property and loss of documents or data entrusted to the firm. The exact scope varies by insurer and by profession, so the policy wording, rather than a general assumption, determines what is and is not protected.

Who needs it: voluntary, contractual and compulsory cases

There is no single law that forces every business to carry PI. Instead the requirement arises in three ways. The first is purely commercial: any business whose work involves giving advice, producing professional deliverables or handling client money is exposed to claims and chooses cover to protect itself. The second is contractual, where a client insists on a minimum level of PI before awarding work. Large organisations and public bodies routinely make this a condition of their contracts.

The third route is regulatory, and this is where PI becomes genuinely compulsory. A number of UK regulators mandate cover for the professions they oversee:

• FCA-authorised firms such as insurance and mortgage intermediaries must hold PI under the prudential sourcebook for mortgage and home finance firms and insurance intermediaries (MIPRU).
• Solicitors regulated by the SRA must hold cover that meets the SRA's minimum terms and conditions.
• Chartered surveyors regulated by RICS must hold PI to RICS-approved wording.
• Accountants in bodies such as the ICAEW and ACCA are required by their institutes to carry cover.
• Architects registered with the ARB are expected to maintain adequate PI.

For these regulated groups, trading without compliant PI is not just a commercial risk but a breach of the rules that can lead to disciplinary action and loss of authorisation.

How FCA regulation shapes PI for financial firms

For firms inside the FCA's perimeter, PI is treated as a prudential safeguard that protects consumers as much as the firm. The FCA sets out minimum cover levels in MIPRU, expressed both as a figure for any single claim and as an aggregate figure across all claims in a year. The minimums are linked partly to the firm's annual income, so a larger intermediary must carry proportionately more cover than a small one.

The rules also limit how much of the risk the firm can retain itself. There are caps on the policy excess that an authorised firm may carry, because an excessive deductible would defeat the consumer-protection purpose by leaving the firm unable to meet a claim. Where a firm cannot obtain compliant PI on acceptable terms, the FCA requires it to hold additional capital instead, so that funds remain available to meet potential liabilities.

This regulatory framing means a financial firm's PI is not just a private commercial decision. The FCA can ask to see evidence of cover, and a gap in compliant PI is a matter the regulator takes seriously because it directly affects the firm's ability to compensate clients who were given poor advice.

Claims-made cover and the importance of run-off

The defining feature of almost all PI policies is that they are written on a claims-made basis. This means the policy that responds to a claim is the one in force at the moment the claim is notified, not the one that was running when the work was carried out. A piece of advice given in 2022 that produces a claim in 2026 is dealt with by the 2026 policy, provided cover has been maintained continuously in the intervening years.

This structure has two practical consequences. First, a firm must keep PI in place without gaps, because a lapse can leave past work unprotected. Second, when a firm stops trading, retires or merges, it needs run-off cover. Run-off continues the claims-made protection for work already done after the business has ceased, typically for a period of years, so that a late claim arising from historic advice still has a policy to respond to.

The retroactive date written into the policy also matters. It marks the earliest date of work for which the insurer will accept a claim. When changing insurer, a firm should ensure the retroactive date is preserved so that historic work is not suddenly excluded from cover.

Choosing a limit and complaints about claims handling

Selecting an appropriate indemnity limit involves looking at the size of the contracts undertaken, the potential loss a client could suffer if the work went wrong, and any minimum imposed by a regulator or a client contract. A firm advising on multimillion-pound projects needs a far higher limit than one producing low-value deliverables. Because PI is claims-made, the limit should reflect the worst credible exposure, not merely the average engagement.

If a dispute arises about how an insurer has handled a PI claim, the firm has recourse. Eligible complainants who are dissatisfied with an insurer's decision can refer the matter to the Financial Ombudsman Service, which provides a free and independent route to resolve insurance disputes. The FOS publishes data on complaints and uphold rates by firm, which can help businesses understand how disputes in this sector are typically decided.

Reading the policy wording closely is essential. Exclusions, conditions about prompt notification, and aggregation clauses that group related claims into a single limit can all materially affect what a firm actually recovers. The wording, not the headline limit, governs the outcome when a claim is made.

Frequently asked questions

Is professional indemnity insurance compulsory in the UK?

There is no single law making it compulsory for all businesses. However, regulators including the FCA, SRA and RICS require it for the professions they oversee, and many client contracts make it a condition of doing business.

What is the difference between professional indemnity and public liability?

Professional indemnity covers claims that your advice or professional work caused a client financial loss. Public liability covers injury to a person or damage to property. Many advice-led firms need both because they protect against different risks.

What does claims-made mean for my PI policy?

It means the policy in force when a claim is notified responds, not the one that was running when the work was done. This is why continuous cover and a preserved retroactive date matter so much.

Do I still need cover after I stop trading?

Usually yes, in the form of run-off cover. Because PI is claims-made, a claim about historic work can arrive after you have ceased trading, and run-off keeps a policy in place to respond to it for a number of years.

Can I complain if my insurer mishandles a PI claim?

Eligible complainants can refer a dispute about an insurer's handling of a claim to the Financial Ombudsman Service. The service is free and independent, and it can direct the insurer to put things right where appropriate.