Short term professional indemnity insurance explained

So, let’s explain short term professional indemnity insurance, often referred to as Professional liability insurance or Errors & Omissions Insurance within broader Financial Lines and General Insurance categories.

You’re a freelance Contractor. You have just won a 6 month project tender. Now, the contract for this tender requires you to have a $2m professional indemnity insurance policy in place as part of your contractual obligations. Do you only need to buy a short term pi policy? No, this is one of the most common insurance mistakes that we see when a contractor takes on a short term project.

This is a common question and highlights the difference between professional indemnity and public liability insurance. While public liability insurance covers injury and damage, professional indemnity insurance covers financial losses due to professional negligence, negligent work, or errors and omissions, making it critical to understand how much professional indemnity insurance I need for the entire duration of liability, not just the contract term. This applies whether you provide professional services as an IT contractor, business consultants, Chartered surveyors, Financial consultants, or even a cybersecurity consultant working in IT contracting.

How does professional Indemnity Work?

How does it work? You see, All professional indemnity insurance (also called pi insurance) policies are arranged on what’s known as a ‘claims made basis’. ‘Claims made’ means the policy must be in place when the demand is made against you. Plus, you need to have cover in force at the time you undertook the work. This means, if your pi insurance is allowed to lapse or cease at the end of a short term contract, you have a problem. The insurer may decline cover if the policy is no longer active when the claim is made. Why? Because the cover has lapsed at the time the demand is made.

Why Retroactive Dates Matter

When maintaining Professional Indemnity Insurance, it’s also important to understand your policy’s retroactive date. A retroactive date is the point in time from which your policy will cover professional work performed.

For example, if your policy has a retroactive date of 1 July 2022, claims relating to work completed before that date may not be covered — even if the claim is made while your current policy is active.

This is why continuity of cover is critical for contractors, consultants, and professionals working on short-term projects. Allowing a policy to lapse, changing insurers without maintaining continuity, or accepting a new retroactive date could create gaps in protection for past work.

Before cancelling or changing your Professional Indemnity Insurance, it’s important to review:

your retroactive date,
any run-off cover requirements,
and whether your past professional services remain protected under the new arrangement.

Policy terms, conditions, exclusions, and retroactive date provisions vary between insurers.

Let us explain further

By way of a real claim example. In this example we focus on the key events in the claim.

Factors

When examining a professional indemnity claim, insurance companies will consider the following factors:

Remember, what we said earlier in this article. The professional indemnity policy responds at the time the demand is made , often following the loss or damage, which underscores why continuous coverage is essential. This brings up the question: is professional indemnity insurance compulsory? For many professionals, especially in regulated industries, it is.

For more information about ‘claims made’ pi insurance, you can read an article from the Australian and New Zealand Institute of Insurance and Finance (ANZIIF).

What is the solution to the problem?

Run-off cover is designed to maintain protection for claims arising from past professional services after active trading ceases.

Many sole traders choose to maintain ongoing PI insurance cover or run-off cover to help manage future claims exposure. This may help maintain protection against future claims relating to past work. That said, it doesn’t mean that the you to maintain the same level of premium payments for the run off period. Run off cover typically allows for reduced premium costs over time – in line with the amount of time since the work was done.

In summary

Your PI policy is worthless if the claim comes in the day after your annual PI policy expires. Remember, if you’re going to do more contracts in the future, keep insurance in place continuously. Alternatively, if there are no other contracts on the horizon, purchase “run off cover” is vital.

If you’re a contractor, consultant, or freelance professional evaluating how to save on indemnity insurance or debunking myths about professional indemnity insurance, our free online quoting tool provides a quick, no-obligation quote.

If you’re a contractor, consultant or freelance professional looking for professional indemnity insurance, visit our free online quoting tool. Get a free, instant, no-obligation Professional Indemnity insurance online quote in minutes.

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With the right professional indemnity coverage, you can focus on your professional work and have peace of mind knowing that you’re protected from potential legal risks.