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Professional indemnity insurance
Professional indemnity insurance, also called professional liability insurance, protects your business if a client seeks legal action claiming errors, mistakes, or negligence related to your work.
What is professional indemnity insurance?
As a small business owner, you do your best to provide high-quality services. Unfortunately, mistakes happen. If a client sues your business claiming you or one of your employees made an error that caused them financial harm, professional indemnity insurance will protect you from the financial losses associated with this legal action.
Indemnity insurance is suitable for most small businesses, but it is particularly useful if you sell industry expertise and knowledge rather than physical products. Examples of these professional service businesses include IT consultants, real estate agents, and public relations professionals.
Many states mandate professional liability insurance for specific industries. While some professionals, such as lawyers, may not be required to carry indemnity insurance in all states, they often must disclose to their clients if they are not currently insured for liability.
Professional indemnity insurance is also called professional liability insurance, errors and omissions (E&O) insurance, or simply PI insurance. Healthcare providers often refer to it as medical malpractice insurance.
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What does professional indemnity insurance cover?
Professional indemnity insurance covers the expenses associated with legal action taken against your business for mistakes related to the professional services you provided. These covered expenses typically include:
- Court fees
- Fines
- Litigation costs
- Attorney fees
- Judgments and settlements
It should be noted that professional indemnity insurance will only cover costs up to your policy limit. If a lawsuit or settlement exceeds this limit, your business will be responsible for covering the remainder.
Claims protected by professional indemnity insurance include:
Professional negligence
Small businesses, especially those that market their specialized skills and expertise, are often held to high professional expectations. The failure to handle a task with the required quality of care and consideration is called "professional negligence."
Because claims of negligence can severely harm a company's reputation and lead to significant legal expenses, it's essential to have robust representation provided by your PI insurance policy.
Breach of contract
When working with clients, you are obligated to deliver the expected services. This is often formalized by a contract signed and agreed upon by both parties. Failing to meet the expectations set by the contract can be considered a breach of contract and may result in litigation.
Oversights and errors
Errors are a normal part of life, but errors in the workplace can have potentially damaging (and expensive) consequences. Your client may sue if an oversight was significant enough to warrant legal action.
Breach of confidentiality
Mishandling of information is unfortunate, but it gets even more harrowing when the information is classified, confidential, or protected intellectual property. Your business could face legal action if a client has reason to believe their confidential information was disclosed without consent.
Poor professional advice
A client may feel that the advice or guidance they received from your small business was so detrimental it caused them to lose income or suffer a financial loss. They may argue that you misrepresented your professional expertise or skill.
Why do you need professional indemnity insurance?
No matter how careful you are, human error is inevitable. The out-of-pocket costs associated with legal action, including frivolous lawsuits, can be expensive. Even if your company did nothing wrong, defending yourself against legal action is often stressful and costly.
Having the right PI coverage can protect your business in the event an unsatisfied customer sues you or an employee for errors or mistakes. Professional indemnity insurance covers the necessary legal fees, fines, and attorney costs so you (and your business) don't have to.
How much does professional indemnity insurance cost?
The average cost of professional indemnity insurance is $61 per month, with 32% of Insureon's small business customers paying less than $50 per month.
Your cost is based on a few factors, including:
- Industry and risks
- Coverage limits and deductible
- Business size
- Day-to-day operations
- Claims history
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Important considerations for professional indemnity policies
When reviewing a professional indemnity policy, small business owners should pay close attention to the following details:
- Cyber liability exclusions: PI policies generally cover claims related to professional services, but they often exclude claims arising from data breaches or network security failure. If your work involves handling sensitive client data, a separate cyber insurance policy is usually necessary to fill this gap. For IT companies, a bundle known as technology professional liability (E&O) insurance includes both professional indemnity and cyber insurance, extending this protection to negligence that leads to a data breach at a client's business.
- The "duty to defend": Most professional indemnity policies grant the insurer the right (and duty) to defend your business against covered claims, meaning the insurance company chooses the attorney and manages the legal process. Some policies, however, operate on a "reimbursement" basis, where you pay for legal defense upfront, and the insurer pays you back later.
- Retroactive date: Since professional indemnity is a claims-made policy, it must be active both when the work was performed and when the claim is filed. To fully protect your small business, it's critical to have an active policy before an issue arises. If someone brings legal action against your business and the event occurred before your retroactive date (meaning, the date your policy started), it won't be covered by your insurance company.
- Extended reporting period (ERP) / tail coverage: If you retire or close your business, you need to purchase an ERP (or tail coverage) to ensure you are covered for future claims related to work you performed in the past.
What does professional indemnity insurance not cover?
Professional indemnity insurance covers most costs associated with protecting your business against legal action, but this coverage does have limits.
For example, professional indemnity insurance does not cover you if you decide to take legal action against a client. It only protects your business should a client or customer sue your business.
Other key exclusions are:
Third-party bodily injury
If a customer or other third party sustains a bodily injury on your business premises, commercial general liability (CGL) insurance is essential.
Business property damage
If your rented or owned business property gets damaged or stolen, you'll need commercial property insurance.
Defamation
If you or your business gets sued for libel or defamation, you'll likely need a general liability insurance policy, even if the matter is taken to court.
What is the difference between professional indemnity and public liability insurance?
Public liability (PL) insurance, often called general liability, covers costs when a non-employee (such as a customer, vendor, or visitor) suffers a bodily injury, property damage, or death resulting from your business operations.
This coverage is often bundled with commercial property insurance in a business owner's policy (BOP). These two policies provide the essential protection against liability and property risks recommended for most qualifying small businesses and self-employed individuals.
A professional indemnity (PI) insurance policy is fundamentally different. It covers a client’s financial loss resulting from your professional errors, omissions, or negligence, including the costs of legal defense and any related settlements or judgments.
These two policies are not interchangeable: professional indemnity insurance addresses purely professional and financial risk, while public liability insurance covers physical and tangible risk.
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Get the right coverage today to protect your business against lawsuits and legal action. Speak to one of our licensed insurance agents, who can help you select the best professional indemnity policy for your needs from the nation's top insurance providers.
Updated: October 9, 2025
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