Is Professional Indemnity Insurance a Legal Requirement?
Professional indemnity insurance protects against the risk of financial loss arising from professional liability . The policy usually covers expenses, including legal fees and compensation for damages or losses that have already been incurred and can be claimed by the insurer for up to a particular judgment amount. It is often purchased in conjunction with other policies, such as workers compensation insurance or property damage liability.
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Is Professional Indemnity Insurance a Legal Requirement?
There are two types of professional indemnity insurance: public risk and private sector. Public risk covers professionals who face exposure to claims relating to their work as medical doctors, dentists, chiropractors, lawyers, etc. In contrast, the private sector covers any profession practising in the business environment (for example, accountant).
The cost of professional indemnity insurance is deductible as an “allowable expense”, as long as it meets the following conditions:
• The claim is for personal injury that results from the professional’s negligence or misconduct
• The insurer requires the insurer to provide coverage for a specific claim
• The amount of money paid by the client about other business losses is significant
• You pay a premium and receive no benefit from the policy, such as being reimbursed or recovering damages on behalf of your client
Professional indemnity insurance and public liability insurance are different. Professional indemnity insurance covers you against losses arising from your professional conduct and may compensate you for defence costs if a client or a third party sues you. On the other hand, public liability insurance covers you against accidents such as falling off ladders or slipping on floor tiles and may reimburse you for medical costs if someone is injured at your place of work.
Suppose there is any doubt about the nature of a claim relating to professional negligence (for example, whether it arises from public or private sector activities). In that case, the tax-deductible status may be in question.
Understanding Professional Indemnity Insurance
It is important to note that professional indemnity insurance is taken out to cover potential liability. If there has been a claim and the insurer will pay out money, the tax-deductible status may be removed. Even if a claim is dismissed or not pursued by the insurer, there may be a tax implication upon settlement or payment of damages.
For example:
• If you are insured for £100,000 and settle your legal liability for £50,000, then the amount of £50,000 is considered assessable income;
• The total amount of loss sustained (i.e. the cost of defending yourself + settlement) may now be tax-deductible;
• The maximum claim amount will reduce by any award or settlement.
• If you do not pay the total loss, this is considered an unrecoverable loss and will increase your taxable income.
• The amount covered by insurance may be reduced. If the insurer pays out £100,000, then £50,000 of that is considered as a deductible expense even if it is later found to be more than claim or settlement;
Is Professional Indemnity Insurance a Legal Requirement? We Look at Some Illustrative Examples:
In these examples, professional indemnity insurance covers medical expenses (paid or payable by client) payable to another person and which arise out of an accident at work resulting from the insured’s conduct in performing their duties.
In the first case, where medical expenses have been paid out, the cost of medical expenses can be considered as a deductible expense because they relate directly to professional activities and meet the requisite test. Furthermore, the insured can claim a tax deduction for any loss-related expenses directly incurred in defending such a claim. If there was a claim, but the insured was not successful in defending it, they may still be able to deduct the amount paid irrespective of whether or how they ultimately recovered.
In the second example, where medical expenses have not been paid out, the money received by the settlement is considered assessable income. There will be no right to claim a tax deduction for loss related expenses in defending such a claim. However, if there was a claim but the insured did not successfully defend it, at least £10,000 has been expended or can reasonably be expected to be expended on such a defence. Still, less than £100,000, the deductible portion is £10,000.
However, this deduction is limited to any amount paid out under insurance policies taken out for professional indemnity insurance and public liability insurance which does not exceed £100,000.
Find out more about the importance of insurance here .
Other useful links about Business Insurance:
Professionals Insurance
Project Manager Insurance
Property Manager Insurance
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