According to finance site NimbleFins, the professional indemnity insurance cost for a business or professional range from under £50 a year to tens of thousands of pounds a year or more.
The cost of PI insurance quotes can also depend on an individual insurance underwriter’s current book. That is, underwriters manage risk for themselves in part by limiting exposure to certain sectors, or not becoming overexposed to certain risks. As a result, if they have written PI cover for many businesses working in a similar industry, they may decide to take a breather and not write more insurance for that industry temporarily.
This can mean that an insurer simply won’t quote, or if they do, that their premiums are noticeably higher than might be expected, or higher than competitors in the marketplace. In the case of the Grenfell disaster, many insurers pulled out of the PI market for architects and construction firms, leading to a hard market. That resulted in fewer insurers offering cover for these industries and, where cover was offered, higher premiums. Insurers that might offer cover in that case would increase premiums to compensate them for taking on this higher risk.
The best way to find a discount on professional indemnity insurance in these cases can to find a reliable broker to help sort indemnity for certain risks at the best price, as well as contacting insurance companies that work directly with customers.
Factors that impact PI insurance premiums
Professional indemnity underwriters use a variety of factors when pricing risks in order to determine the premium on a policy. This can include:
- The industry (e.g. architecture, law, accountancy, design, finance, etc.)
- The type of work done (e.g. advising on mergers and acquisitions, designing high-rise apartment buildings, etc.)
- The size of the business (e.g. turnover, number of employees, etc.)
- The size of the individual client contracts
- The experience of the business owners and directors
- Any previous claims history
- Level of protection needed (e.g. a policy limit of £100,000, £1,000,000, etc.)
- Geographical coverage
The cost of PI insurance can be as little as £45 or so for a sole trader or freelancer in a relatively low-risk industry such as consulting or bookkeeping. However, PI insurance costs can easily reach into the thousands of pounds a year for larger businesses, especially those engaged in riskier work such as architecture and construction, finance, and other work where a mistake or negligence could result in a significant loss to a client.
For example, a construction firm engaged in multi-million pound projects will pay towards the higher end of the range of costs for PI insurance. And architects will generally pay more because a mistake in their work can cost thousands, or even millions of pounds to put a mistake right (e.g. having to tear down and rebuild a structure if a design flaw means a building is not safe or does not meet the specifications). Meanwhile, tax advising accountants, financial advisors or insolvency practitioners could also make mistakes worth a lot of money, or that risk a client breaking the law.
Ultimately, insurers will want to get a handle on the amount of money a policyholder could cost a client if the wrong advice is given, or in the case of other negligence. In other words, how much will it cost to fix an error or a situation where a client perceives a financial loss due to professional advice, service or design.
How much PI insurance coverage is necessary?
The cost of PI insurance is partly determined by the limit of the policy. But how much cover is really necessary? This will vary tremendously from one business to the next and ultimately is up to the business to decide.
Firstly, find out if a certain minimum amount of coverage is required by any clients or industry bodies. For example, solicitors, accountants and finance professionals all must meet certain minimum levels of professional indemnity coverage according to their respective industry bodies.
Secondly, consider the following questions:
- What is the maximum compensation that could be awarded to a client in the case of an error or negligence? That is, how much money would a mistake cost a client to fix?
- How big are the client contracts? Larger contracts can mean a larger financial loss to a client if something goes wrong.
Also, in addition to the limit on compensation claims, consider the legal fee limit, which is the amount of funds available to pay for a legal defence in case of a claim, whether valid or frivolous.
Many businesses find these questions difficult to answer on their own. In that case, it can help to work with a specialist business insurance broker or speak directly with an insurance company. They should be able to help a business decide upon the correct level of cover.