Professional indemnity

What it means

Professional indemnity covers loss caused by a mistake in providing an expert service: accounting, tax advice, legal work, design, IT.

It differs from ordinary liability cover in reaching pure financial loss: a penalty, interest or a loss the client suffers without any physical damage to property.

The cover pays only when the provider is genuinely liable for the loss. If a penalty arose because the client delivered documents late or incomplete, the liability is theirs and the insurer does not pay. Intentional acts and knowing breaches of duty are normally excluded, so the policy protects against mistakes, not against a careless attitude to deadlines.

How it works in practice

For an accounting firm it is standard, and it is stated in the mandate contract. The client sees that a provider error has real cover behind it, not just a clause.

The scope follows the volume of work handled: number of clients, size of tax liabilities, payroll. The sum insured should match the largest plausible error, not the average one.

When an error comes to light, for example after a tax audit, we notify the insurer at once, before the penalty or interest is paid. The client supplies the authority’s decision and proof of payment, and we describe how the error arose and what we did about it. Late notification is one of the reasons insurers cut payouts.

What to watch out for

Policies cover claims made while the policy is in force. When switching insurer, arrange retroactive cover for the period when the mistake happened, or a gap opens between the two policies.

An accounting firm’s policy may cover bookkeeping only. If the same firm also runs payroll or gives tax advice and the error happens there, the client has no cover to call on. It is worth comparing the list of insured activities with what the provider actually does under the contract.