It’s a simple truth that the business world is becoming more litigious, which means that when things go wrong, claims and disruptions can cost firms time and money.
What you have between your ears, your knowledge and expertise, could well be the core of your business. Your clients pay you for this and it is what they rely on. With this trust, of course, comes risk. They trust your advice and your decision making. While you may have complete confidence in your abilities, you are still human and so are the team around you. If someone makes a mistake, you will be left to correct it. If that happens, Professional Indemnity (PI) insurance can come to the rescue.
For SMEs who provide advice or a service, PI should not be an option, it should be a no brainer. The simple truth is claims can run into millions of pounds and the consequences of having no cover or inadequate cover could be devastating. Some reports have estimated that a loss of £50K could be enough to send 40% SMEs to the wall.
PI protects you and your business should your client claim that you have provided inadequate advice or services. It covers legal expenses in defending the claim as well any compensation needed to fix the problem.
But I don’t need cover, right?
Offering a service or professional advice is not limited to accountants, lawyers and architects. A wide range of small businesses could fall foul without the right protection. A Tree Surgeon could cut down the wrong tree. That would be dramatic for the tree, but what would it mean for the Tree Surgeon? Damaging, or even carrying out work on a tree without permission can lead to a fine of up to £20,000. A serious offence could find them in court subject to costs and an unlimited fine.
It can be surprising how broad a church needs to consider PI. For example, a driving instructor offers a service that comes with an expectation of a certain level of professionalism and specialist knowledge. If things go wrong, they could be held accountable for financial losses and any legal action – which can be particularly damaging for SMEs who typically don’t have the robust legal, compliance or financial resources available to manage these issues and the lengthy defence process without threatening their entire business.
What’s the worst that could happen?
Think about the biggest mistake you could make in your professional life. Not something any of us want to consider, but accidents and errors happen. We have seen what an error could cost a tree surgeon. But what if you were a consultant working for a major firm and holding sensitive data from your client? Imagine you lost it, a laptop left on the train or stolen. The information could be taken literally or virtually through a cyber theft. Either way, you would be responsible.
The next question is how much would it cost to put the problems right? The short answer is more than you might expect. Compensation, legal costs, loss of income while you are not working and damage to your reputation.
How much cover do I need?
In regulated industries like the legal profession, minimum levels of cover are required to practise. Elsewhere, a limit of £1 million cover is typically required at the very least, with other common limits being £2 million and £5 million. A good insurance broker should be able to advise you to ensure you have adequate cover.
Getting the right level of cover is essential to protect against your firm footing the bill. An investigation by The Financial Conduct Authority (FCA) showed underinsurance was widespread in the SME sector. In nearly a quarter of cases, the sums insured proved to be inadequate to cover the actual loss suffered.
Some of the main things you will need to consider when taking out PI are:
- Start with a sound risk management plan. It is always best to prevent claims happening in the first place. Also, in the longer term you will improve your chances of getting a better premium.
- The size of the client contracts you work on. The larger the client, the higher your PI limit should be.
- Likely compensation claims. If you are working with FTSE 100 type firms, the hit is likely to be much higher than SMEs.
- Legal costs can grow exponentially. Again, this will be linked to the type of client and the nature of your work. However, regardless, you need to allow for the longevity of a legal claim and future-proof the costs over potentially years.
However professional you are in your work, a good PI policy offers you and your clients peace of mind and could well help you win contracts.