Written byProfessional indemnity insurance is business cover that pays claims arising from professional advice or services that cause a customer financial loss.
Also known as: PI insurance, professional liability insurance, indemnity cover
Key points
- It responds to claims of negligence, errors or omissions in your work, and pays the legal costs of defending them.
- Licensed occupations often must hold it: brokers, accountants, advisers, engineers, architects and medical practitioners are common examples.
- Most policies are claims made, so cover must be current when the claim is made, not when the work was done.
- It does not cover injury or property damage from your day to day operations: that is public liability.
- Holders of an Australian credit licence must have compensation arrangements in place, usually satisfied by this insurance.
How professional indemnity insurance works
The trigger is a claim that your advice, design, report or service caused someone a financial loss. The insurer steps in to defend the claim and, if you are liable, pays the compensation up to the policy limit. Defence costs alone can be substantial, which is often the real value of the cover.
Because cover is claims made, the policy that responds is the one in force on the day the claim is notified. That is why retroactive dates and run off cover matter: if you stop trading or sell the business, claims about old work can still surface years later.
Who needs professional indemnity insurance
Anyone paid for skill, advice or judgement. Some hold it because a regulator requires it, some because a client contract does, and some because one mistake in a report could cost more than the business is worth. Consultants, designers, bookkeepers, surveyors and IT contractors all sit in that group.
In finance it is part of the licensing furniture. ASIC expects licensees to have adequate arrangements to compensate retail clients, and the obligations that sit alongside it, such as the best interests duty, shape what a claim can look like. Check the current requirements with your licensee or lawyer.
Example
A structural engineer signs off a mezzanine floor for a warehouse fit out. Two years later the owner finds the load rating was calculated on the wrong figures and has to rip out and rebuild the steel. The owner claims the cost of the rework and the lost trading weeks. The engineer notifies her current professional indemnity policy, which responds because the work falls after her retroactive date. The insurer appoints lawyers, negotiates the settlement and pays it, less the excess, keeping the practice trading.
Not to be confused with
- Public liability insurance
- public liability covers injury and property damage; this covers faulty advice or work
Frequently asked questions
What does professional indemnity insurance cover?
Claims that your professional advice or services were negligent, wrong or incomplete and caused a financial loss. It pays compensation up to the policy limit and the legal costs of defending the claim. Some policies extend to defamation, loss of documents and breaches of confidentiality. Check the policy wording.
Who needs professional indemnity insurance?
Anyone selling skill or advice. It is compulsory for many licensed occupations, including financial services and credit licensees, medical practitioners, lawyers and building surveyors, certifiers and design practitioners in some states. Others take it because client contracts demand it or because a single error could sink the business.
Is professional indemnity the same as public liability?
No. Public liability covers physical harm: a customer injured on your site or property you damage while working. Professional indemnity covers economic loss from your advice or work product. Many consultants carry both, because a single job can create either kind of exposure.
What does claims made cover mean?
The policy that responds is the one in force when the claim is made against you, not the one you held when you did the work. That is why you keep cover going after finishing a project, and why run off cover matters when you retire or sell the business.
Is professional indemnity insurance tax deductible?
Premiums for cover taken out to protect a business are generally deductible as a business expense in the year paid. Treatment can differ if the policy covers private activity or a period before trading started. Confirm with your accountant or check the ATO's guidance on business insurance.
Related terms
Broader term: Insurance
Insurance
Insurance is a contract where you pay a premium and an insurer covers specified losses, such as damage to a financed asset or a lender's loss on default.
Read definitionLiability
A liability is a legal responsibility to pay money or answer for a loss; in accounting, a present obligation to transfer an economic resource, shown on the balance sheet.
Read definitionBroker
A broker is a licensed intermediary who connects borrowers with lenders, comparing finance options across a panel of lenders and submitting applications on the borrower's behalf.
Read definitionAustralian credit licence (ACL)
An Australian credit licence (ACL) is the authorisation from ASIC that a business needs to provide consumer credit or credit assistance under the National Consumer Credit Protection Act.
Read definitionASIC
ASIC is the Australian Securities and Investments Commission, the regulator for companies, markets, financial services and consumer credit, which licenses providers, keeps public registers and enforces conduct laws.
Read definitionBusiness risk
Business risk is the chance that an event or condition stops a business meeting its objectives, from profitability and growth to regulatory compliance and continuity.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.