Professional Indemnity Insurance: Essential Cover for Service Providers
What is professional indemnity insurance?
Professional indemnity insurance protects you if a client claims financial loss due to your professional error, negligence, or failure to deliver. It covers legal costs and damages if you're found liable. Essential for accountants, lawyers, consultants, engineers, and other professionals.
Key takeaways
- Professional indemnity protects against claims for professional mistakes, negligence, or breach of duty by you or your staff.
- It covers the cost of defending the claim, legal fees, and compensation awarded to the client.
- It's often required by professional bodies, clients, and regulatory authorities before you can practice.
- Claims-made policies are most common; they cover claims reported during the policy period, not when the error occurred.
- Run-off cover extends protection after you retire or sell your practice, protecting against future claims from past work.
Who Needs Professional Indemnity?
Professional indemnity is essential for anyone selling advice or services to clients. Common professions include accountants, auditors, tax consultants, lawyers, engineers, architects, surveyors, investment advisers, management consultants, IT consultants, medical and allied health professionals, and design firms.
If your mistake costs a client money, and they sue, professional indemnity covers your legal defence and the compensation they're awarded. Without this cover, you risk losing your reputation, savings, and business.
What Professional Indemnity Covers
The policy covers claims arising from breach of professional duty, negligence, error, or omission in the services you provide. Examples include:
- An accountant's incorrect tax advice results in an SARS penalty
- An engineer's design miscalculation causes structural failure
- A consultant's wrong advice damages a client's business
- A lawyer misses a deadline, losing a client's claim
- An IT adviser's security recommendation fails, leading to a data breach
The insurer investigates, appoints defence lawyers, and pays settlements up to your policy limit.
Claims-Made vs. Occurrence Policies
Most professional indemnity policies are claims-made: they cover claims reported to the insurer during the policy period, regardless of when the error occurred. This differs from occurrence policies, which cover errors that happen during the policy period, regardless of when they're reported.
Claims-made policies are cheaper but require continuous cover. If you cancel and don't arrange run-off cover, claims reported after cancellation won't be covered. This is why run-off cover is crucial when you retire or sell your practice.
Run-Off Cover & Retirement
When you retire, sell your practice, or cease trading, you need run-off cover (also called tail cover). It extends protection for claims arising from work you did before you retired, but reported after you've left.
Clients sometimes don't discover your error for months or years. Without run-off cover, you could face uninsured claims. The cost of run-off varies, but it's usually a one-time premium that provides multi-year cover. Discuss this with your insurer before you retire.
Frequently asked questions
What's the difference between professional indemnity and public liability?
Do I need professional indemnity if I've never had a claim?
How is the professional indemnity premium calculated?
Can professional indemnity cover be refused?
Related guides
- What Does Business Insurance Cover in South Africa?
- Business Insurance Cost in South Africa: What Affects Your Premium
- Public Liability Insurance: Protect Your Business from Third-Party Claims
- Small Business Insurance in South Africa: Protect Your Startup or SME
- Business Insurance vs. Personal Insurance: Key Differences
- Business Insurance overview