At a glance
- Understanding PI insurance terms can help sole traders compare policies and identify possible gaps before buying or renewing cover.
- Key details to check include claims-made basis, retroactive date, limit of indemnity, excess and exclusions.
- Policy wording can differ between insurers, even where similar terms are used.
- Reading the policy schedule and full wording gives a clearer picture of how the cover applies to your work.
Professional Indemnity (PI) insurance is designed to respond to claims alleging that a client suffered financial loss due to professional advice, services, errors or omissions. Depending on the policy, it may help cover legal defence costs and compensation that the insured is legally liable to pay. It can be relevant to sole traders across many advice- and service-based occupations, including consultants, business coaches, graphic designers and photographers.
Before buying or renewing cover, sole traders should understand the terms that determine how a PI policy operates. Terms like claims-made basis, retroactive date, excess and limit of indemnity can affect whether a claim falls within the policy and how much the insurer may pay. Other terms, including run-off cover and the policy period, become particularly relevant when stopping work, closing a business or managing the transition between one policy and the next.
This guide explains the Professional Indemnity insurance terms sole traders should know, helping them read their policy documents more confidently and ask informed questions before purchasing cover.
Claims-made basis
Professional Indemnity insurance generally operates on a claims-made basis. This means the policy usually needs to be active when a claim is first made against you and reported to the insurer, even if the work that led to the claim was completed earlier.
For example, if a graphic designer finishes a project in March and the client makes a claim in October, the policy active in October may respond, provided the work falls after the retroactive date and all other policy terms are met.
This differs from Public & Product Liability insurance, which generally responds to covered incidents that occur during the policy period, even if the claim is made later.
Retroactive date
The retroactive date sets how far back your PI insurance can cover past work. If the claim relates to work you completed before that date, the policy will generally not cover it, even if the claim is made while your policy is active.
This becomes particularly important when changing insurers. Check that the retroactive date on the new policy goes back far enough to cover your earlier work. For example, if a business coach has been working for five years but the new policy only covers work completed from the date it starts, claims linked to those earlier five years may not be covered.
Sole traders should also inform the insurer of any complaints or errors that could lead to a claim. The new policy will generally not cover an issue the insured already knew about before the policy took effect, even if the work was completed within the retroactive date.
Limit of indemnity
The limit of indemnity is the maximum amount the insurer may pay for a covered claim, subject to the policy wording. Any amount above the applicable limit would remain the business’s responsibility.
Some clients, contracts or professional bodies require a minimum level of PI cover before work can begin. For example, a photographer or graphic designer may be asked to hold $2 million or $5 million in cover before accepting a project. Sole traders should check these requirements before selecting a limit.
A higher limit may increase the premium because the insurer is taking on greater potential liability. The appropriate limit depends on the sole trader’s occupation, contract values and any client or industry requirements.
Excess
The excess is the amount you may need to pay out of pocket before the insurer contributes to a covered claim, subject to the policy terms and limit of indemnity. For example, if an eligible claim costs $5,000 and the policy has an excess of $500, you pay the $500 excess, and the insurer contributes the remaining $4,500.
An excess often applies to each claim rather than once for the entire policy period. However, policies differ, including whether the excess applies to compensation, defence costs or both. Sole traders should check this when comparing policies, as a higher excess increases the amount they may need to pay if a claim occurs.
Exclusions
Exclusions describe the claims, activities or circumstances a policy does not cover. Every PI policy contains a list of exclusions, but the specific wording can differ between insurers.
Depending on the policy, exclusions may apply to claims arising from known circumstances, deliberate or dishonest conduct, criminal acts or contractual responsibilities that go beyond the sole trader’s usual professional duty. For a broader explanation of what PI insurance may or may not cover, refer to our blog on What Does Professional Indemnity Insurance Cover and What It Does Not.
Sole traders should read the exclusions together with the policy’s coverage provisions and definitions. A claim may appear related to professional work but still be excluded because of the conduct involved, the type of service provided or when the issue first became known.
Certificate of Currency (CoC)
A Certificate of Currency provides evidence that a Professional Indemnity insurance policy is active. It is not the full policy document. It usually lists key details such as the insured business name, type of cover, limit of indemnity and policy period.
Clients, tender panels and procurement teams may request a CoC to confirm that a sole trader holds the insurance required under a contract or tender. It allows them to verify that the policy is current and that the indemnity limit meets their requirements before they award the contract or allow work to begin.
With Sami Insurance, eligible businesses can complete the quote-to-cover process online and receive the Certificate of Currency in minutes once the policy starts. This can be useful when a client, tender panel or procurement team requests proof of cover at short notice and the sole trader needs to provide it quickly.
Defence costs
Defence costs are the legal and professional expenses involved in responding to a claim. Depending on the policy, these may include solicitor fees, expert advice, document preparation and correspondence with the person making the claim.
These costs may be covered even if the allegation is not ultimately upheld, provided the claim falls within the policy and the insurer has approved the expenses. Sole traders should contact the insurer before appointing a lawyer or taking any other action, as costs incurred without the insurer's consent may not be covered.
Defence costs are separate from compensation or settlement amounts paid to resolve a claim. Whether they sit within or outside the indemnity limit, and whether an excess applies, depends on the policy wording.
Run-off cover
Because professional indemnity insurance is claims-made, a claim can still arise after you have stopped trading, changed occupation or closed your business, based on work you completed while you were covered. Run-off cover is what protects you against that gap.
A consultant who winds down their business after several years, for example, could still face a claim the following year from a client they worked with previously. Without run-off cover in place, that claim would fall entirely outside their protection, even though the work was carried out while they held a valid policy.
Run-off cover is not automatically included with every policy, and the length of the cover can vary. Sole traders planning to stop trading, retire or move into a different type of work should check whether run-off cover is available and for how long, before their current policy ends.
Policy period
The policy period is the start and end dates shown on your policy schedule and Certificate of Currency. It tells you when your cover begins and when it is due to end.
This is particularly important for PI insurance because the policy generally needs to be active when a claim is first made and reported to the insurer. If the policy expires and is not renewed immediately, a claim made during the gap may not be covered, even if the work was completed while an earlier policy was active.
Keeping track of the policy period and renewing before it ends, rather than after, helps avoid a gap that retroactive date or run-off cover cannot always fix.
Knowing your way around terms like claims-made basis, retroactive date and run-off cover can make it easier to compare policies, spot possible gaps and understand what you need to do if a claim or potential issue arises. It also helps you check whether the occupation, activities, cover limit, excess and exclusions shown on a policy suit the way you work.
If you are reviewing cover for your business, Sami Insurance offers Professional Indemnity insurance with cover available up to $10 million for sole traders, freelancers and small businesses.
Get a quick quote online to see whether the cover is suitable for your occupation and business activities.
FAQs
Are Professional Indemnity insurance terms the same across every insurer?
No. Many insurers use similar terms, but the definitions, conditions and notification requirements attached to them can differ between policies. Sole traders should read the specific policy wording and schedule rather than assuming a familiar term will mean the same among insurers.
What is the most important Professional Indemnity insurance term to understand?
No single term determines how the policy operates. However, the claims-made and notified basis, retroactive date and definition of professional services are particularly important. Together, they help determine whether a claim is made while the policy is active, whether the underlying work falls within the period the policy covers, and whether the work itself is the type of service the policy is intended to cover.
Do I need run-off cover if I stop freelancing?
It's worth considering. Because PI insurance is claims-made, a claim can still arise after you've stopped trading, relating to work completed while you held a valid policy. Run-off cover protects against that gap. Checking whether it's available, and for how long, is a good step to take before your current policy lapses.
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The Sami Team
