Professional indemnity and public liability: what each one actually covers

These two covers get confused constantly, and the confusion is understandable. Professional indemnity and public liability are both liability policies. Both may respond when a third party alleges that your business caused them a loss. Both turn up in contracts as a requirement.

They address different things, though, and the gap between them is where businesses get caught — usually at the point a claim arrives, which is the worst time to find out.

The short version: professional indemnity and public liability

Public liability may respond to personal injury or property damage your business causes to a third party.

Professional indemnity may respond to financial loss a third party suffers because of the professional advice, service or work your business provided.

Injury and damage on one side. Financial loss arising from your work on the other.

Public liability: injury and damage

This is the cover most businesses recognise. A visitor slips in your premises. Your delivery driver reverses into a customer's roller door. A contractor's equipment damages a floor. Someone is hurt at a site you were working on.

The allegation will usually arise from personal injury or property damage for which your business is said to be legally liable.

It is generally not designed to respond to a loss that is purely financial, with no injury and no property damage attached. That is the boundary that surprises people.

Professional indemnity: the advice and the service

Professional indemnity is designed to respond where a third party suffers financial loss because of an act, error or omission in the professional services your business provided.

That covers more occupations than the word "professional" suggests. Consultants, accountants, engineers, architects, designers, IT and software providers, recruiters, marketing agencies, surveyors, building designers, brokers and advisers all provide something a client relies on. So, in practice, do many businesses that would not describe themselves as advisers at all — anyone specifying a product, preparing a report, certifying something, or making a recommendation a customer acts on.

The loss does not need to involve anything physical. A client acted on what you told them, or on work you produced, and lost money as a result

Where businesses assume an overlap that isn't there

The clearest way to see the boundary is with the same business in two scenarios.

An engineering consultancy. A visitor trips on a cable in their office and breaks a wrist — public liability. The same firm specifies the wrong load rating and the client has to rebuild a structure — professional indemnity.

A building contractor. Their excavator damages a neighbouring fence — public liability. Their design or specification causes a defect the client has to remedy — professional indemnity, or a design liability extension, depending on how the programme is arranged. An IT provider. A technician drops a rack and damages a client's server — public liability. A configuration error causes days of downtime and lost revenue — professional indemnity. In each case, the business is at fault. Which policy is engaged depends on what kind of loss followed.

The difference that catches people out: claims-made cover

This one matters more than the coverage boundary, and it gets far less attention. Public liability is usually written on an occurrence basis. The policy in force when the injury or damage happened is the policy engaged — even if the claim arrives years later, and even if you have since cancelled or moved insurers. Professional indemnity is commonly written on a claims-made-and-notified basis. Subject to the wording, the relevant policy is generally the one in force when you first make a claim against you and notify the insurer—not the policy in place when you performed the work. That has three practical consequences.

Retroactive date. A claims-made policy generally responds only to work performed after a specified date. That date can move forward when insurers change or cover lapses and restarts, leaving earlier work outside the policy. Continuity matters, and it is easy to lose it without noticing. Check it whenever the programme changes.

Notification of circumstances. Most PI policies require you to notify not just claims, but circumstances that might give rise to one. Examples include a complaint, a dispute, a client saying they are taking advice, or a matter that could reasonably be expected to lead to a claim. The policy's wording, timing, and notification requirements matter. If in doubt, seek advice promptly rather than assuming an issue will resolve itself. Run-off. Stop trading, sell the business, or retire, and claims-made cover stops with the policy. Work you completed years ago can still generate a claim. Run-off cover is what keeps the door open, and it needs arranging at the time, not afterwards. Businesses that have wound down, sold, or restructured an entity are worth a specific conversation on this point

When a contract asks for both

Contract requirements are often where the question first comes up. A customer, principal or head contractor asks for evidence of both, at specified limits, sometimes with themselves noted on the policy.

Two things are worth checking rather than assuming:

• Whether the limits required match what you hold, including whether the limit is per claim or in the aggregate for the period
  

• Whether the contract asks for anything the policy does not do — cover for the customer's own liability, a particular endorsement, or a waiver of the insurer's rights of recovery.

Signing a contract with insurance obligations that your programme does not meet can create an uninsured contractual exposure.

So, do you need both?

For many businesses, public liability is the starting point.

Even a business that mainly provides advice, design, software or professional services can have ordinary third-party injury and property-damage exposure. A client may visit the office. Staff may attend a customer’s premises. Equipment may be damaged while work is being carried out. A visitor may trip, fall or otherwise be injured in connection with the business’s operations.

That is the day-to-day exposure public liability is designed to address.

Professional indemnity becomes relevant where the business gives advice, makes recommendations, designs, specifies, certifies, manages, configures or otherwise provides work a customer relies on—and where an error, omission or failure in that work could cause the customer financial loss.

For that reason, many professional and service businesses need to consider both:

• Public liability for third-party personal injury or property damage arising from their premises, operations, products or work activities.

• Professional indemnity for claims alleging that professional services, advice, design, recommendations or other work caused financial loss.

The balance will differ by business. A consultant working from an office may have modest public liability exposure but substantial professional indemnity exposure. A contractor may have substantial public liability exposure and may also need PI or design liability cover if it accepts responsibility for design, specification or professional services.

The question is not simply whether the business calls itself “professional.” It is whether people can be injured, property can be damaged, or customers can lose money because they relied on the work the business performs.

Talk to us about your cover

If you are unsure how your liability covers fit together, are reviewing what a contract requires, or have changed what your business does since the covers were arranged, Virtus can help you work through the commercial insurance issues relevant to your circumstances. This article provides general information only and is not legal or personal advice. It does not take into account your objectives, financial situation or needs. The availability and scope of cover, and the way a policy may respond, depend on the relevant policy terms, conditions, limits, exclusions and the circumstances of any claim. Obtain appropriate legal and insurance advice for your circumstances.