Dear Doctor, do I need professional indemnity insurance?
Ben Rose says...
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Professional indemnity insurance (PI) is designed for those businesses that offer a professional service or advice. That includes software developers, IT consultants, advertising agencies, designers; any business where you’re selling your knowledge and expertise.
In these cases, PI will protect you if you make a mistake, or if a client suffers – or claims to suffer – a financial loss as a result of your work, covering legal expenses and compensation you have to pay. And beyond the protection it offers, you may also find that clients insist you have PI – so it could even help you win business (or not lose it!).
PI was originally developed for more traditional professions such as law, medicine, architecture and accountancy, where professional negligence is fairly easily spotted (such as a solicitor giving bad legal advice or a surgeon amputating the wrong leg!). However, with today’s digital businesses, the scope of possible negligence can be much broader.
If you’re a software development business, for example, you might be held liable if the software you’ve built doesn’t meet the specification, is delivered late, fails or isn’t fit for purpose. You might also be held liable for breaching an NDA or right to privacy, IP infringement or transmitting a virus. Even if you’ve done nothing wrong, but your client alleges that you have, you could incur some hefty legal costs defending yourself.
Types of PI
With this in mind, it’s important to understand that there are different types of PI policy: those that are ‘negligence-based’ and therefore only cover mistakes which are specifically listed as being covered, and those that cover any civil liability unless specifically excluded (and are therefore much broader). As a media or tech business, you’re likely to need the latter.
When researching your options, you need to think about where your clients are based. If they are abroad – particularly the US or Canada – you might need worldwide jurisdiction cover, so check this before purchasing. If you’re a tech company, you should also consider a policy that will cover you for liquidated damages, ie penalties specified in a client contract. So if you’re found in breach of an agreement – not meeting your service level agreement, for example – your insurance policy can come to the rescue and pay the contractual penalty as well as the legal costs.
One thing to be aware of is that a PI policy won’t cover you for any activities before the retroactive date, even if the results of those actions were felt after the policy came into effect. Often insurers set the retroactive date as the first day the policy started, which means that if a piece of software you built a year ago was faulty, but it only became apparent more recently after you bought your PI cover, this wouldn’t be covered. Some more specialist policies such as Digital Risks’ PI, which is available on our website, have unlimited retroactive cover as standard, so you know that you’ll be covered regardless of when the mistake was alleged to have occurred.
Another important thing to note is that you must notify your insurer as soon as possible after you become aware of a circumstance which might reasonably be expected to result in a claim against you. For example, that could be when you realise you made a mistake or when you receive a complaint from a customer. It’s usually a condition of PI policies that circumstances are notified to the insurer in a timely manner.
While you’re thinking about PI, you should also consider cyber liability insurance, which can protect you against more specific cyber risks including breaches of data protection legislation and financial loss following a data breach or cyber-attack. Either way, Digital Risks’ policies are specifically designed for digital businesses, meaning that they take into account the new and technical risks you’re likely to face, including social media mishaps, IP infringement or mishandling of data. So you can rest assured you’re fully protected.
Digital Risks (www.digitalrisks.co.uk) is a specialist insurance provider that focuses 100% on the needs of digital businesses.