Professional liability insurance

What it responds to

A claim that your work fell short and cost the client money. A specification with an error in it, a missed deadline, advice that turned out to be wrong, a filing not made, work that did not do what it was engaged to do.

It generally covers the defence as well as the settlement, and the defence is frequently the larger part, because these claims turn on professional judgement and are argued rather than measured.

It responds to allegations rather than to proven failures. A claim that is ultimately unfounded still has to be answered, and answering it is what the cover is for.

Claims-made, and what that means

Professional liability is normally written on a claims-made basis: what matters is that a policy is in force at the moment the claim is made, not when the work was done.

That is the reverse of general liability, and the consequence is stark. Stop paying for professional liability and cover for everything you have ever done generally stops with it, however long you held the policy.

It also means continuity has real value. A policy held without interruption is worth considerably more than the same policy bought and dropped between projects.

The retroactive date

The retroactive date sets the point before which work is not covered at all. Work done before it is outside the policy no matter when the claim arrives.

When changing insurer, the original retroactive date needs to be carried forward. If it is reset to the new policy's start, cover for everything done previously quietly disappears — with no gap in cover and nothing on the paperwork that looks wrong.

It is one of the few details worth checking personally on a renewal rather than assuming has been handled.

Tail cover

Extended reporting, usually called tail cover, allows claims to be made for a period after the policy ends. It is the answer to the claims-made problem when you retire, sell the business, change professions or move to a different arrangement.

It is generally far cheaper to arrange at the moment the policy ends than to discover later that it was needed, and in most cases it cannot be arranged retrospectively at all.

Anyone winding down a practice should treat this as part of the wind-down rather than an optional extra, because the exposure outlives the business.

Who needs it

Anyone whose client could suffer a financial loss from the work being wrong, rather than from something being broken.

• Consultants and advisers of every kind
• Designers, architects and engineers
• Accountants, bookkeepers and financial professionals
• Agencies, marketers and IT services
• Contractors who design as well as build, where a design error is a professional claim rather than a general liability one
• Anyone whose contracts name it, which is increasingly most professional services