Every professional knows the feeling: a client pushing for tighter deadlines, the contract that’s just a little too heavy‑handed, or the nagging worry that a small oversight today could snowball into a costly dispute tomorrow. Even the most diligent work can be challenged – whether through allegations of negligence, contractual penalties, or claims that stretch far beyond what you thought you’d agreed.
That’s where Professional Indemnity Insurance (PII) comes in. It acts as a safety net, stepping in when mistakes, misunderstandings, or disputes threaten to become financial or reputational crises. Whether protecting against defending spurious claims, or covering genuine errors, PII gives you the confidence to focus on your work.
Below, we unpack how PII works in practice: including the scope of cover, exclusions, defence costs, and the important question of limits and excesses.
What’s protected under PII?
At its simplest, a PII policy provides indemnity against loss arising from claims for a breach of professional duty, defined as any neglect, error, or omission committed in the course of your work. Not all policies are worded equally, however – some are stricter (e.g. only covering claims in negligence) and some are more extensive.
Certain PII policies go further than the standard cover, providing indemnity to the insured for any civil liability. This can include cover for breach of contract, libel and slander, nuisance, trespass, and a whole range of other wrongs – although will typically be subject to a long list of exclusions. These include Employers Liability (EL), Public Liability (PL) and other risks traditionally covered under specific policies.
PII policies often exclude liability in contract to the extent that it is more extensive than any liability which would otherwise have existed. Examples include late delivery penalties (or similar contractual promises to pay liquidated damages), business interruption, and other unforeseeable economic losses.
Which costs does PII pay?
Subject to the insurer’s prior consent, PII policies typically provide cover for the costs of investigation, defence and settlement of claims – and embrace lawyers for investigation and defence, loss adjusters, experts and court fees. They may also cover the costs of investigating circumstances, or mitigating potential claims.
The claimant’s own legal costs do not normally fall under the defence costs section of the policy. Instead, these form part of the claim against the insured professional.
What is the “claims made” format?
In the UK, PII generally operates on a “claims made” basis, meaning that you are only covered for claims made (and reported to the insurer) during the period of insurance. This is unlike other policies which provide indemnity for ‘losses occurring’ during the policy period.”
Other jurisdictions may have different rules. For example, European PII policies have historically been written on a “losses occurring” basis. However, the trend worldwide is towards “claims made.”
PII policies generally require the notification of both “Claims” and “Circumstances” which may give rise to a claim.
Limit of indemnity – how does it work?
The limit of indemnity is the maximum amount of money that your PII policy will pay out. It typically operates as the annual aggregate for all claims, or can be on an “any one claim”/ “each and every claim” basis.
Where the limit is not aggregated, careful attention needs to be paid to the definition of a claim. A series of claims that are linked are often deemed to be a single claim under the policy.
What is the excess amount?
The excess is the first amount of every claim that is uninsured. It generally applies to each and every claim, but it may be aggregated or removed.
Excesses may be inclusive or in addition to costs:
A costs inclusive excess applies to both the costs and the indemnity. The excess is paid by the client whenever their insurer investigates or defends a claim against them, regardless of its outcome.
A costs in addition excess does not apply to costs. It is only paid when a client is at fault, and the insurer must pay a claim for damages. A successfully defended claim should not cost anything under this form of excess. This form of excess is commonly more expensive than a costs inclusive excess.
For more information, reach out to a member of our team.
