What is Professional Indemnity Insurance? Why Is It Important?

| August 27, 2020

What is Professional Indemnity Insurance? Why Is It Important?

Let’s say you are an accountant, and you help your clients with tax planning. But your tax advice leads your client to financial loss.

Similarly, an IT client may end up losing data after using integration software recommended by their IT consultant. Or an angry client accuses an interior designer of devaluing their property sue to an inappropriate fitout.

Mistakes and misunderstandings happen in professional services. Sometimes, your professional advice or consultation do not work out, no matter how carefully they are delivered.

Not all clients are understanding and forgiving.

They can sue you on the grounds of negligent or poor advice, thereby forcing you to defend yourself or provide compensation.

Otherwise, they can file a lawsuit against you. And defending your business against claims of negligence can be expensive.

Whether you pay damages or contest the matter in court, you can end up with substantial financial costs, which can have a serious impact on your cash flow, especially if you are a small business.

That is why professional services, consultants and firms should have professional indemnity insurance in place to cover such claims and lawsuits.

Also known as Errors and Omissions Cover or professional liability insurance, it can financially protect consultants and businesses providing professional service and advice for loss or damages caused by their negligence or breach of duty in the course of their services.

Understanding Professional Indemnity Insurance in Detail

Professional indemnity insurance covers claims filed against you for negligence or breach of duty in your professional advice or service. 

In layman’s terms, it can pay for your claims, costs or legal defence as well as settlements or judgments. This way, it can eliminate the need for paying out of your own pocket.  

For example, a marketing agency provides promotional material for a campaign. The client argues that the promotional material is ‘not as briefed’ or promised and makes a claim on the marketing agency for loss of revenue. Professional indemnity insurance may pay for the costs involved in defending the claim and damages awarded. 

Professional indemnity insurance should not be confused with public liability insurance. 

Public liability insurance can cover your business against claims for third party personal injury and property damage caused by your business operations.

Professional indemnity insurance, on the other hand, can protect you against claims for negligence and breach of duty in your professional services. 

What Professional Indemnity Insurance May Cover

  • Damages and compensation filed against you.
  • Breach of Duty
  • Legal and Court Fees.
  • The cost of Investigation. 

And What It Doesn’t Cover

In some cases, professional indemnity insurance might not be able to cover you. Some of them are…

  • Illegal operations
  • Exemplary or Intentional Damages (as found by a court).
  • Asbestos
  • Employee Injuries (Worker’s Compensation Insurance typically covers it). 

(NOTE: Please read your policy carefully as the cover may vary from insurer to insurer for inclusions and exclusions.) 

Who Needs Professional Indemnity Insurance?

If you belong to a service-based profession, that charges clients for advice or services you should have professional indemnity insurance. 

Damages or loss caused by your services can prompt clients to claim damages. Even if the claim is baseless, you may have to pay for your defence if a lawsuit filed against you.  

Professional indemnity can cover the potential costs of unforeseen errors or negligence and defence costs.

Some key professions requiring professional indemnity insurance are…   

Consultants IT Professionals Accountants
Real Estate Agents Tax agents Business Consultants
Environmental consultants  Marketing agencies  Architects
Software developers Engineers Web developers 

Why is Professional Indemnity Insurance Important?

Professional indemnity cover can help protect you financially, should a claim be made against you for negligent or faulty advice. You never know when things can go wrong or when a client can try and turn their problems into your issue.

Here is a rundown of the benefits of professional indemnity insurance.

Covering the Cost of Litigation:

Many professionals misjudge the cost of litigation. The cost of defending yourself against PI claims can be well over $10,000 and can hit $50,000 and more. Paying this vast amount can ruin the finances of a small professional services business.

Providing Peace of Mind:

You can deliver your professional services with more confidence as you know that you may be covered for the advice you provide. 

Ensuring the Continuity of Your Services:

One expensive claim can ruin your finances which may eventually bring your business to a standstill. If you have professional indemnity insurance in place, you can efficiently deal with such things. After all, the cover can help you defend claims and pay for damages.

Making You Look Credible:

While professional indemnity insurance can protect your business from claims of negligence or breach of duty, it also adds to your credibility. Some clients may also require you to have professional indemnity insurance before hiring you. 


Professional indemnity insurance is a crucial cover. For businesses that charge a fee for advice, it can provide protection against loss or damages arising from a breach or negligence. It is smart to choose an experienced professional indemnity insurance broker to acquire a suitable level of coverage at an affordable  price.

*Important: Cover may be available subject to meeting insurers underwriting criteria. Some of the covers listed may or may not be available or may have limitations or exclusions. Cover inclusions vary significantly from insurer to insurer. DO NOT rely upon the above. Check your policy schedule carefully for inclusions and exclusions and limitations. Talk to a business insurance broker for more information.

Author Bio:

Romit Malhotra is the brand representative of Smart Business Insurance, a leading Australian insurance broker. A big foodie, he loves to travel the world. Also, a diligent businessman, Romit likes to pen down his thoughts on related topics whenever he finds some free time.