An IFA’s Guide to Professional Indemnity Insurance

The Financial Conduct Authority (FCA) lists Professional Indemnity Insurance as a mandatory requirement for Independent Financial Advisers (IFAs). This guide answers your questions on Professional Indemnity Insurance for IFAs: from why you need it, to what it covers, and how it works if a claim is made against you.

What is Professional Indemnity Insurance?

If a client alleges that the professional advice you have provided has led to them losing money or has damaged their reputation, Professional Indemnity Insurance – sometimes known as PI insurance or PII – can protect your business from any related legal claim.

What does Professional Indemnity Insurance cover?

As well as claims related to alleged negligence, Professional Indemnity Insurance will also cover your business for an alleged breach of contract as well as defamation or libel, loss of paperwork, dishonest conduct of employees, breach of confidentiality such as inadvertently releasing confidential client information, and some policies may cover infringement of intellectual property or copyright.

Do I need Professional Indemnity Insurance?

Yes, every IFA should have Professional Indemnity Insurance as required by the FCA. No one sets out to make a mistake in their work, but it can happen and it’s better to have the security of an insurance policy that could meet the costs of a client’s claim against you.

Do I need Professional Indemnity Insurance for a limited company or if I’m self-employed?

Regardless of the legal structure of your company – whether you are limited or self-employed – you should protect your business with Professional Indemnity Insurance.

How much does Professional Indemnity Insurance cost?

The cost of a Professional Indemnity Insurance policy will depend on the size of your business, the sector you operate in, how much cover you require, and whether you have experienced any claims in the past.

How much cover will I need?

The FCA states the minimum cover – the amount a policy will pay out for any one claim and in total for a year – you should have in place. You should also look at other factors such as the size of the contracts you have with your clients. Your compliance colleagues and the FCA will be influential here too if you are in the financial sector and capital adequacy is monitored.

How does Professional Indemnity Insurance work?

A client you advise claims that services you have performed for them led to them losing money or suffering reputational damage, alleging that the advice you gave was negligent. As soon as you become aware that there could be a potential claim you would advise your insurance provider who will handle the legal work on your behalf and work with you to defend and settle the dispute. Your Professional Indemnity Insurance picks up the costs of the defence as well as any potential damages agreed with your client.

What is an example of a Professional Indemnity Insurance claim?

An IFA provides tax advice to a client which later proves to be inaccurate. The client claims the advice has cost them money and they make a claim against the IFA for damages. The IFA informs their Professional Indemnity Insurance provider who works with them and the claimant to settle the dispute. In some instances, cases can be settled before they go to court.

Can I claim Professional Indemnity Insurance against tax?

A Professional Indemnity Insurance premium is tax deductible, helping to make a policy even better value for your business.

What is a retroactive date in Professional Indemnity Insurance?

A retroactive date refers to the date from which you first took out a Professional Indemnity Insurance policy and have held uninterrupted cover since, even if you have used different insurers during that time. Any claims made against you that happen before this date, will not be covered by your Professional Indemnity Insurance. When taking out cover you can ask for your policy to be backdated to a time when you did not have Professional Indemnity cover to provide protection should a claim from that period be made against you.

What is Run-Off cover?

Even if your business has stopped trading or you sold the company, you are still potentially liable for claims made against you from past activity. This means you should consider buying Run-Off cover for a period after you have ceased trading.

Does Professional Indemnity Insurance contribute toward acceptable capital adequacy levels?

FCA regulated firms are required to meet certain regulatory capital requirements and buying Professional Indemnity Insurance is a way of reducing those requirements. If a firm does not have Professional Indemnity cover, they would face sanctions from the FCA for being in breach of their capital requirements.

Learn more

To discuss any of the issues raised in this article, contact us on 0330 029 6525 or email us at professions@aon.co.uk

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