Do sole traders need professional indemnity insurance?

By Isaac Rangaswami on Small Business UK - Advice and Ideas for UK Small Businesses and SMEs

Although being your own boss has plenty of benefits, it also means the buck stops with you. You’re on the hook for winning clients, delivering work and making sure you get paid for it. The same goes for keeping track of what you earn and putting the right amount away, so you can pass along what you owe to the taxman.

In between all of your other responsibilities, it’s easy to forget to protect your business too. It’s hard to envisage any customer being unhappy enough to sue, but mistakes happen – and when they do, they can cost you and your clients a lot of money. One way to equip your business to deal with the possibility of legal action is through professional indemnity insurance. 

What is professional indemnity insurance?

Professional indemnity insurance is used by sole traders, freelancers and business owners to secure against being sued by clients who say they’ve suffered a financial loss, specifically due to a mistake they claim you’ve made. The main things this type of insurance covers are your legal fees and the costs of resolving the issue in question. 

As a bookkeeper, for instance, you’re entrusted with making payments on behalf of clients. If you were to be tricked into sending money to a fraudster through a phishing email, your client could accuse you of professional negligence, since you’ve lost them money doing the job they hired you to do. If you have professional indemnity insurance and your claim is approved, your insurer could help you settle the issue by stumping up the cash to compensate your client and any legal costs if it goes to court. 

Managing client data is another area where professional indemnity insurance has become important. Let’s say you’re an IT consultant who stores and maintains data for clients. If you outsource your servers or backup processes, and those fail, vital client data could be irrecoverably lost. If a client loses data and launches a legal claim against you, professional indemnity insurance could pay for the cost of replacing their lost data and any legal bills.

What does professional indemnity insurance cover?

A lot of professional indemnity revolves around the term “negligence”. According to insurance provider Hiscox, professional negligence is when you fail to perform your “responsibilities to the required standard or breach a duty of care.” Here’s another way of putting it: if somebody hires you to do a very specific job, and that’s where you slip up, that could be called negligence. 

You’re more likely to have a claim made against you if you’re a consultant, bookkeeper or a surveyor, for example, where you’re expected to be an expert. Mistakes in these areas feel like professional negligence as you have clear responsibilities, which can be particularly costly because they relate to somebody’s business, finances or home. Even if you’re careful and have good systems in place, small errors can have far-reaching effects. 

Negligence is also one of the main areas covered by professional indemnity insurance because it crosses over into other reasons clients might take you to court. Professional mistakes can overlap with claims around intellectual property (IP), for instance, where you might have accidentally used someone’s IP without their permission. The same goes for unintentional defamation, where clients believe that you’ve said something that could damage their reputation, and breach of confidence, where a client claims you’ve shared sensitive information without their permission. Then there’s the possibility of lost or damaged documents too, which increasingly applies to data. These are only a few examples.

Do sole traders need professional indemnity insurance? Who needs it most?

Plenty of sole traders won’t need professional indemnity insurance, mainly because their line of work won’t involve mistakes that could cost clients money. But if you give advice, offer a professional service, handle data or copyrighted materials, or could risk damaging someone’s property, professional indemnity insurance could be well worth your while. 

Areas where professional mistakes are more costly – and more readily associated with the reason they hired you to do the job – are where this type of insurance is most likely to be needed. That means accountants, bookkeepers, marketers, designers, business advisers, architects, IT consultants, property professionals and many more. For jobs with industry regulators, like accountants, architects and financial advisers, professional indemnity insurance is compulsory.

If you run a clothing shop, for example, you’re probably less likely to need professional indemnity cover. Still, there are exceptions to these rules: if your shop also happens to mend customers’ clothing, and it gets lost or damaged on your watch, that might be a scenario where professional indemnity insurance could help. 

How does professional indemnity insurance compare to public liability insurance? 

Although professional indemnity insurance and public liability insurance sound similar, they’re slightly different. Public liability relates to claims by members of the public for injury, illness or damage, such as a customer slipping on a wet floor on your premises, or a customer getting ill from food you’ve served them. 

As we’ve seen, professional indemnity is all about mistakes or negligence, where clients say they’ve lost money. Public liability is broader: in addition to customers, it extends to suppliers and even passers-by. Still, both types of insurance do have one thing in common, in that they’re about protecting your business from certain eventualities and their associated legal costs.

How much professional indemnity insurance cover do I need?

Brokers like Moneysupermarket say that professional indemnity insurance can cover you anywhere between £50,000 to £5m and above, while some high street banks put the lower limit around £250,000. Either way, there’s a big range and the amount of insurance cover you need depends on what your business does. It’s easier to get a benchmark if you’re a member of an industry body, like the FCA, which may specify a minimum level of professional indemnity insurance that its regulated businesses should hold.

Likewise, a client contract may require you to have a minimum amount of insurance before you can start any work. In any case, it’s up to you to decide if you need a higher level of cover. It’s not an exact science, but another way to reach a rough figure is through mapping out some worst-case scenarios, by looking at the size of your contracts and the potential cost of a compensation claim if a big mistake was made. Some providers, like PolicyBee, provide a list of real-life professional indemnity claims, which mention how much the insurer paid out. 

How much does professional indemnity insurance cost?

As with most business loans, the cost of professional indemnity insurance hinges on what you do, how much you need and the risk involved. A key factor insurers are interested in is the size of your business, so they’ll look at your annual turnover to work that out. Just as life insurance costs more if you’re older, businesses that make more money are considered more of a risk, which means their insurance will probably cost more.

The type of service you provide is also important, as some professions and industries are seen to be riskier than others. If you do a job where mistakes can be particularly costly, like the various advisory roles we’ve listed in detail above, you can expect to encounter higher insurance premiums.

Ultimately, professional indemnity insurance won’t be right for every sole trader. But for those who work in sectors where costly mistakes can happen, it could make all the difference. 

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