Professional Indemnity (PI) insurance is essential for protecting you and your firm from legal costs and potentially significant damages arising from claims of actual or alleged negligent advice, errors, or omissions.
It is important to remember that PI insurance operates on a ‘claims-made’ basis, meaning it only provides cover if a policy is in force at the time a claim is made.
Before lapsing or cancelling your policy, ensure you have a replacement policy or Run-Off cover in place.
Main Reasons PI Insurance is Cancelled or Not Renewed
▪️ Business is closing
▪️ To save money
Claims-Made Policies – Claim Example
A software company holds Professional Indemnity insurance. An important program update fails to function as intended, and customers immediately notify the company, expecting them to fix the software and reimburse them for lost sales and additional costs.
The claim is covered under the current claims-made policy, even if the original software contributed to the failure, because both the client’s demand for damages and the insurer notification occurred while the policy was active.
This differs from Public Liability insurance, which covers personal injury based on the date of the incident (occurrence-based), rather than when the claim is reported to the insurer.
Key Risks of Not Renewing PI Insurance
▪️ Exposure to Past Claims – Since PI insurance operates on a claims-made basis, if there is no active policy, there is no cover for legal defence costs or potential damages arising from past work.
▪️ Financial Risk – Legal fees, damages, and expert reports can be costly. Without insurance, prior directors may be personally liable, along with the business if it is still operating.
▪️ Reputational Risk – Claims can damage a business’s professional reputation. PI insurance often covers public relations (PR) costs to assist with client management.
▪️ Limited Future Cover – If you purchase cover at a later date, insurers are likely to only provide protection from that date onwards, meaning all work undertaken before that point will be uninsured.
▪️ Compliance and Contractual Issues – Many industries and contracts require continuous PI coverage, even after a contract has ended. Cancelling your cover could lead to regulatory non-compliance, contract breaches, and penalties.
Run-Off Cover for Businesses Closing or Being Sold
Even if you are retiring or closing your business, Run-Off cover is strongly recommended. It is often easier to budget for a single upfront premium for a three- or seven-year policy that keeps you protected, rather than trying to engage and pay a lawyer to defend you against any future claims.
Thinking About Letting Your PI Insurance Lapse?
Talk to your professional insurance and risk adviser first. They can review your situation and explain the available options, ensuring you make an informed decision