Professional indemnity insurance is advisable for limited companies selling their service, expertise or skills. This product funds compensation payments and associated legal costs defending and settling claims from clients who claim the work provided cost them money. This could be in lost revenue, future loss in earnings, or added costs to put right the issue due to bad advice or workmanship. While some limited companies may pay tens of thousands of pounds a year, the cost of professional indemnity insurance for a limited company can be as little as £80 a year (Read more here in the full NimbleFins guide to limited company insurance).
Professional indemnity insurance is not a legal requirement, nor is it essential for all businesses, but certain fields are a lifeline.
Think about the type of industries where bad decisions could cost a customer substantial amounts of money. It could be an architect has miscalculated a plot, and a part of the development needs to be re-done, or a consultant’s five-year plan does not turn its client’s fortunes around, meaning it is now fighting severe losses. It could also be small-scale, where a landscape designer recommends certain plantings that turn out to not be suitable for the site, and die, needing to be replaced with more suitable plants.
Businesses that more commonly take out professional indemnity insurance, or that are required to by certain regulatory or professional bodies, include:
- Financial advisors
- Healthcare professionals
Other businesses that should consider professional indemnity insurance but are not typically as at risk of high-value claims include:
- Other tradespeople
- Construction managers or professionals
- Coaches, trainers or those in education
- Advertising, marketing and PR agencies
- Event organisers
- Software developers
Some industry bodies require professional indemnity insurance as terms of membership or accreditation, while some customers will demand it to sign a contract with a business.
Limited company professional indemnity insurance
Not all limited companies need professional indemnity insurance, but those that offer advice or expertise – as listed above – are wise to consider it. Some industry bodies require professional indemnity insurance to become a member of their body. The Architects Registration Board recommends £250,000 for each claim with a six-year ‘run off’ clause. The Financial Conduct Authority requires the cover of €1,250,000 for a single claim. Or an aggregate of €1,850,000 or 10% of annual income, whichever is higher.
Professional indemnity insurance can often (but not always) be sold with a ‘retroactive date’. This means an insurer will honour claims made against the company before its current policy began, even if insurance was held with a different provider when the incident took place. There is a big but with this – the insurance must be held continuously. Any break in policy means a retroactive policy only honours incidents that took place from the first day of the current continuous insurance.
This is similar to a ‘claims made’ policy. An insurer will only honour claims made when a policy is active. If it expires, the policy no longer stands – even if an incident took place while the policy was active.
Does a limited company need run-off insurance?
Typically, yes. It can often be years until the effect of work carried out is realised, particularly when giving advice to clients. For this reason, it is especially important to keep professional indemnity insurance up to date. A run-off clause is also advisable when continuous cover ends.
This protects the business from claims made after the business stops trading and professional indemnity insurance is cancelled or expires. Experts suggest a run-off of six years. Many professional bodies also advise six years run-off.
What insurance do I need for a limited company?
The insurance a limited company needs depends completely on the line of work it does, the risks associated, the number and type of employees and where it carries out its work, as well as other factors.
The only legally required insurance for a limited company (in most cases) is employers’ liability insurance. This is essential for any limited company hiring a worker that they supply equipment to, deduct income tax and national insurance from, and determine the hours and location work is carried out. Staff also qualify to be protected under employers’ liability insurance if they are treated the same as permanent members of staff, the business has a right to profits made and the worker is not allowed to subcontract work to anyone else.
None of the other above policies are essential, but limited companies can find a number of products a valuable defence against what could potentially be millions of pounds in compensation payments and legal costs. It can therefore make them more competitive without realising, as they will be willing to take risks that could offer huge wins.