What is Professional Indemnity Insurance?
Professional indemnity (PI) insurance — also called professional liability insurance — protects businesses and individuals who provide professional advice or services against claims that their work caused a client financial loss.
Unlike public liability insurance, which covers physical injury and property damage, professional indemnity addresses the financial consequences of professional errors, omissions, negligence and breach of professional duty.
If a client alleges that your advice, designs, reports, plans or professional services caused them to suffer a financial loss, professional indemnity insurance covers your legal defence costs and any compensation you are ordered to pay.
Who Needs Professional Indemnity Insurance in NZ?
Professional indemnity is relevant to any business or individual that provides knowledge-based services or advice to clients. This includes but is not limited to:
Mandatory or Strongly Recommended:
- Financial advisers and investment managers (required under FSLAA)
- Lawyers and barristers
- Accountants and auditors
- Engineers and architects
- Healthcare professionals (doctors, specialists, allied health)
- Insurance brokers and advisers
- Surveyors and valuers
- IT consultants and software developers
- Management consultants
- Marketing and PR agencies
- Graphic designers and creative agencies
- HR consultants
- Real estate agents
- Building inspectors
- Trainers and educators
- Recruitment agencies (advice on candidates)
- Mortgage brokers
- Property managers
- Event planners and coordinators
- Business coaches and mentors
- Nutritionists and wellness coaches
What Does Professional Indemnity Cover?
A standard professional indemnity policy covers:
Legal Defence Costs The cost of defending a claim — including legal fees, expert reports and court costs — whether you are ultimately found liable or not. Defence costs alone frequently exceed $50,000 for contested claims.
Compensation and Settlements If you are found liable for a client's loss, or if you agree to settle a claim, your PI policy covers the compensation up to your policy limit.
Errors and Omissions Claims arising from mistakes in your work — an error in a financial model, a flaw in a design, a missed deadline that caused client loss.
Negligent Advice Claims that your professional recommendation or advice was negligent and caused financial harm.
Breach of Duty Claims that you failed to meet the standard of care expected of a competent professional in your field.
Intellectual Property Infringement Many PI policies include cover for accidental infringement of copyright or other intellectual property in your work product.
Defamation Some policies include cover for defamatory statements made in professional communications.
What Professional Indemnity Does NOT Cover
Criminal or Deliberate Acts PI does not cover intentional wrongdoing, fraud or criminal conduct.
Bodily Injury and Property Damage Physical claims are the domain of public liability insurance, not PI.
Employment Disputes Claims by current or former employees are covered by employer's liability or management liability, not PI.
Known Claims or Circumstances Any claim or potential claim you were aware of before taking out the policy will be excluded. This underscores the importance of continuous cover without gaps.
How Professional Indemnity Works: Claims-Made Basis
Unlike most other insurance policies, professional indemnity operates on a claims-made basis. This means:
- The policy that responds is the one in force when the claim is made, not when the work was done
- A claim can arise years after work was completed — for example, an architect may face a claim 5 years after a building is designed
- If you cancel your PI policy and a claim is subsequently made for past work, you will not be covered
- Maintain continuous PI cover while you are in business
- When you cease trading or retire, arrange run-off cover to protect against future claims for past work
- When switching insurers, confirm the retroactive date — this is the earliest date from which historical work is covered
How Much Does Professional Indemnity Insurance Cost in NZ?
PI premiums are calculated based on several factors:
- Revenue and fee income — the primary pricing factor for most professions
- Type of professional activity — higher-risk activities (medical, financial advice, engineering) cost more
- Limit of indemnity — higher limits mean higher premiums
- Excess/deductible — a higher excess reduces premiums
- Claims history — prior claims significantly increase premiums
- Geographic exposure — cover for US or Canadian clients is significantly more expensive
- Small professional services firm (sub-$500k revenue): $1,500–$4,000/year
- Medium firm ($500k–$2M revenue): $3,000–$10,000/year
- Large firm or high-risk profession: $10,000–$50,000+/year
Choosing the Right Limit of Indemnity
Many businesses choose PI limits based on what they can afford rather than what they actually need. This is a mistake. Consider:
Contractual Requirements Client contracts often specify minimum PI limits. Review all major client agreements before choosing your limit.
Professional Body Requirements Your professional body may stipulate minimum limits as a condition of membership or practising certificate.
Scale of Work Your PI limit should reflect the potential financial impact of your largest error. If you manage a $10 million project and an error causes significant rework costs, a $1 million policy limit will not be sufficient.
Common Limits in NZ:
- Sole trader professionals: $1–2 million per claim
- Small firms: $2–5 million per claim
- Mid-size professional firms: $5–10 million per claim
- Large firms and high-risk professions: $10–20 million+
Run-Off Cover: The Often Forgotten Protection
When a business closes or a professional retires, the PI risk does not end. Claims for past work can arise years later. Run-off cover (also called tail cover) is a standalone policy that provides ongoing protection after you cease trading, typically for a period of 6 years (reflecting NZ's limitation period for civil claims).
Run-off cover is strongly recommended for:
- Retiring professionals
- Businesses being wound up
- Sole traders ceasing to trade
- Professionals selling their practice
Getting Professional Indemnity Insurance
The best way to obtain appropriate PI cover is through a specialist insurance broker or adviser. They can:
- Assess your specific risk profile
- Compare PI policies from multiple insurers
- Ensure the policy wording covers your specific activities
- Negotiate competitive premiums
- Assist with claims if they arise
A specialist in commercial insurance for businesses across New Zealand, with expertise in helping SMEs and professional services firms navigate the commercial insurance market.