Professional Indemnity Insurance

What is Professional Indemnity Insurance?

Professional indemnity insurance protects businesses and individuals against claims that their professional advice, services, or work caused a client to suffer financial loss. It covers your legal defence costs and any compensation you are required to pay — regardless of whether the claim against you has merit.

Any business or individual that provides expertise, advice, designs, or professional services carries PI risk. This includes professional services firms, technology and IT companies, healthcare providers, and anyone in a construction and trades or consulting role.

Claims-Made vs. Occurrence Policies

Professional indemnity insurance in New Zealand is almost always written on a "claims-made" basis. This means cover responds when the claim is made to your insurer, not when the underlying error occurred. This has two important implications:

1. You must maintain continuous cover — a gap in coverage could leave you exposed to claims arising from past work 2. You should consider run-off cover when you cease business or change insurer, to protect against claims made after your policy expires

Unlike occurrence-based policies (where the event triggers cover regardless of when the claim is made), claims-made policies require active cover at the time the claim is received. This is why run-off cover is so important — claims can emerge years or even decades after professional work was completed.

What Triggers a Professional Indemnity Claim?

Professional indemnity claims arise when a client believes you have caused them financial loss through:

• Negligent advice: Recommending a course of action that causes loss
• Errors and omissions: Mistakes in analysis, design, or specification
• Breach of professional duty: Failing to meet the standard of care expected of a competent professional in your field
• Failure to deliver: Not completing work to the agreed standard or specification
• Confidentiality breaches: Disclosing confidential client information
• Intellectual property infringement: Using protected material in your professional work

It is important to understand that a claim does not require you to have actually been negligent. Clients can and do bring claims that are ultimately unsuccessful — but the cost of defending even a baseless claim can be substantial. Professional indemnity insurance covers these defence costs from the outset.

Retroactive Dates and Run-Off Cover

Retroactive Dates

When you first purchase PI insurance, your insurer will establish a retroactive date — the earliest date from which past acts are covered. Work performed before this date is typically excluded. When you first purchase PI, aim to negotiate the earliest possible retroactive date (ideally going back to when you first started providing the relevant professional services).

Run-Off Cover

When you stop trading — through retirement, sale, or business closure — you need run-off cover to protect against claims for work you performed while operating. The risk is real: a client may not discover a problem with your work until months or years after it was delivered. Run-off cover typically provides 2–7 years of claims-made protection after your business ceases.

Professional Indemnity Limits in New Zealand

Common PI limits in New Zealand range from $250,000 to $10 million or more. The right limit depends on:

• Professional discipline: Engineers and financial advisers typically carry higher limits than marketing consultants
• Client profile: Large commercial or institutional clients with significant assets at stake warrant higher limits
• Contract requirements: Many commercial and government contracts specify minimum PI limits
• Project or engagement size: The scale of what you are delivering determines the scale of possible loss

Mandatory PI Requirements by Profession

Many professions require PI cover as a condition of practice or professional body membership:

• Financial advisers under FSLAA must hold adequate PI insurance
• Lawyers (New Zealand Law Society membership requirement)
• Engineers (Engineering New Zealand recommends PI for all members)
• Accountants (CAANZ requires PI for practising members)
• Architects (New Zealand Institute of Architects requirement)
• Real estate agents (REINZ membership expectation)
• Medical professionals (various professional bodies — see healthcare insurance)

How to Choose a Professional Indemnity Policy

The Insuring Clause

The insuring clause defines exactly what the policy covers. Key questions:

• Is the definition of "professional services" broad enough to cover everything you do?
• Are work done by subcontractors or employees covered?
• Does the policy cover claims arising from past work before the retroactive date?

Defence Costs: Within or In Addition to the Limit?

Some PI policies pay defence costs within the limit of indemnity (reducing what is available for compensation). Others pay defence costs in addition to the limit. If your limit is $500,000 and defence costs are $150,000, a "within limit" policy leaves only $350,000 for compensation. Always clarify this with your broker.

Excesses

PI policy excesses can range from $500 to $25,000 or more for larger firms. A higher excess reduces your premium but means you carry more of the financial risk on smaller claims. Consider what level of excess your business could comfortably absorb.

Professional Indemnity and Cyber: A Critical Combination

Professional services businesses holding client data face both PI exposure (financial loss from your professional work) and cyber exposure (data breach costs and regulatory obligations). These are distinct risks requiring separate insurance products:

• Cyber liability insurance covers data breach response, Privacy Act 2020 notification obligations, and business interruption from cyber events
• Professional indemnity covers financial loss claims from clients arising from your professional errors

A technology consultant whose code error destroys a client's database has both a PI claim (client financial loss) and potentially a cyber claim (data breach). Both covers should be in place.

Public Liability as a Companion Cover

Most professional services businesses also need public liability insurance alongside their PI cover. PI covers financial loss claims; public liability covers bodily injury and property damage you cause to third parties. They are complementary, not duplicative.

Practical PI Premium Ranges by Profession

• Management consultants and coaches: $1,200 – $6,000 pa
• IT consultants and developers: $2,000 – $10,000 pa
• Financial advisers (FSLAA): $2,500 – $12,000 pa
• Engineers (civil, structural): $3,000 – $20,000+ pa
• Architects and designers: $2,000 – $12,000 pa
• Accountants and bookkeepers: $1,500 – $8,000 pa
• Marketing and creative agencies: $1,000 – $5,000 pa
• Healthcare professionals: $2,000 – $20,000+ pa (see healthcare guide)

See also: public liability insurance, cyber insurance, directors & officers insurance, and guidance for professional services businesses and technology companies.